Card debts may cause more economic chaos (From The Northern Echo)

Card debts may cause more economic chaos

10:18am Tuesday 4th August 2009 in

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WITH unemployment expected to top four million and many households suffering from reduced income, there are fears that massive creditcard debts could trigger more economic turmoil.

Britain, where consumer debt in proportion to income has climbed above 170 per cent, is seen as more vulnerable to such a crisis than European countries and the US, where the International Monetary Fund (IMF) fears 14 per cent of consumer debt will turn sour.

The IMF believes consumer debt losses in Europe could hit £1.5bn – much of it in Britain.

A lot of this debt, such as sub-prime mortgages, was securitised – passed on to new holders – and The Financial Times warned last week that the impact could extend beyond banks, possibly hitting insurance companies and pension funds.

Our plastic-fuelled spending spree is unravelling fast.

Outstanding card debt tops £64bn, but with average interest rates at 18 per cent, or 36 times current Bank base rate, that is a big strain on the 40 per cent of card-holders who pay interest on outstanding balances. Andrew Hagger, at Moneynet.co.uk, believes that card companies may have kept their rates high in defence against the looming problems.

“If the debt situation worsens, rates could top 18 per cent,” he said. “I see big writeoffs becoming an increasing trend.”

Over two years, the noose has slowly drawn tighter on those who have overspent.

The old trick – keep switching debt to new cards with nought per cent balance transfers – is harder to pull off as providers tighten terms.

Capital One, a leading provider, has withdrawn nought per cent balance transfers.

Barclaycard’s nought per cent offer on balance transfers is down from 14 months to 12, and other providers, including Royal Bank of Scotland and its brands, and HSBC, restrict balance transfers to existing customers.

“Nearby everybody who could qualify for Virgin Money’s nought per cent balance transfer for 16 months has probably got it by now,” said Mr Hagger. “It’s been the first port of call for a long time.”

Hagger notes that a few products remain for clients with good credit records: Santander’s nought per cent balance transfers run for 15 months, while two others offer nought per cent for 13 months – Halifax Mastercard and BT Visa Credit Card.

Daniella Lipszyc, solicitor and director at North-West law firm Ultimate Law, which advises card-holders in trouble, fears that some consumers face 50 years of suffocating debt.

“Introductory offers, such as nought per cent balance transfers and nought per cent APR for the first few months, get consumers signed up,” she said.“Many don’t realise that once the initial period of the agreement ends, rates can rocket and interest payments can get out of hand.

“It takes almost 50 years to clear a debt of £5,000 by making the minimum repayment each month, on a typical APR of 16.9 per cent,” she added.

Card providers, for their part, are also under pressure: they have lost rich pickings from the sale of Payment Protection Insurance with cards due to new regulations, and have seen penalty charges which they levy on late payers cut by Government action.

But they can always raise rates. Mrs Lipszyc believes card providers have “terrific freedoms” despite the new controls.

“My husband had an Amex card charging 19.6 per cent, which jumped to 26 per cent, a 33 per cent rise – a few days after Bank base rate hit 0.5 per cent,” she says.

As problems deepen, Mrs Lipszyc thinks providers may accept deals – perhaps accepting a portion of a £10,000 debt – to tidy the books.

But the providers’ decision to raise the spending limit for many customers in recent months, without being asked to do so, could backfire badly.

Price-comparison service uSwitch.com reckons 5.7 million people received a boost to their credit-card limit in the last year without being told about it, giving an average £1,538 per person for an extra £8.8bn of spending power.

“In the current climate, you could be fooled into thinking that increasing spending limits is a good thing as it stops people going over the limit and incurring extra charges,” says uSwitch’s Louise Bond.

“However, the issue is far more complicated. Providers are taking away consumer choice by throwing extra credit at people without their consent.

“Unless you regularly pay off your credit card bill in full, keeping high levels of debt on interest-bearing credit cards isn’t advisable. It’s an expensive form of borrowing.”

Peter Harrison, credit-card specialist at Moneysupermar ket.com, says consumers must be aware of different rates charged on balance transfers and new purchases. A tempting nought per cent on balance transfers might run for 12 months, while new purchases incur interest charges after three months.

Both Nationwide and Saga cards, he said, offer a “positive hierarchy” of repayment – money paid back each month cuts debt attracting the highest rate of interest.

“The fact is that many people who can’t repay debts intend to keep paying the minimum monthly sum required – usually one to five per cent of outstanding balance – in the hope something turns up,” said Mr Harrison.