Credit Card

Credit card debt is still rising

The recent speech kerfuffle by David Cameron and his advisers over whether or not he should recommend we pay off our debts was an interesting one. We all know, of course, that the reason why it was cut from the final speech – it was pretty hypocritical! But that isn’t the reason why we’re not paying off our credit cards, I suspect the main reason is because we have no incentive to. As written below, interest rates show little sign of increasing – we have no incentive to pay off our debts quickly, and we have even less incentive to save more. But why should we save more? Many of us are beginning to realise the risk our savings face when placed in a bank and even more are experiencing the effects of the devaluation of money.

The article, from Save our Savers, looks at the personal debt issue and how Mr Cameron really has little chance of persuading us to pay anything off.

Remember the kerfuffle over David Cameron’s speech at the Conservative Party conference? The Prime Minister had planned to say: “The only way out of a debt crisis is to deal with your debts. That means households – all of us – paying off the credit card and store card bills.” After a panic, it was changed to: “That is why households are paying down the credit card and store card bills.”

It turns out that both statements were wrong. Households are NOT paying off their plastic debt. True, headline totals have fallen. But that’s only because the banks have written off bad credit card debt.

According to the Bank of England, in September total outstanding credit card debt was £57 billion. That was £2.1 billion less than a year earlier but, over the same period, the banks wrote off over £3.9 billion in bad debts.

The reality is that, over the year, borrowers put another £1.75 billion of debt onto their credit cards. Perhaps that’s not surprising when it’s still so easy to borrow at 0% interest on credit cards.

On a more positive note personal loans decreased by £7.6 billion over the past year and only £3.2 billion of that was written off by the banks. It is not clear whether this is because there is less demand to borrow or because the banks are being more cautious about who they lend to. However, given the rapid growth of peer to peer lending, the latter looks more likely.

Mortgages

The number of houses sold over the past year has fallen 10% and the Land Registry reports that prices have declined by 3.2% year-on-year. Yet, despite this, mortgage debt is still increasing, although at a low rate of 0.6% a year.

In total, Britons owe £1.24 trillion on their mortgages and make regular mortgage repayments of over £2.5 billion a month. 10 years ago total mortgage debt was only £577 billion and about £905 million was being repaid regularly each month. Home ownership hasn’t increased significantly, yet £1.5 billion more is being spent on monthly debt repayments, money that cannot be spent in the shops or invested in the economy.

As with credit cards, the common perception is that people are taking advantage of low interest rates to pay down their mortgages. But according to the Bank of England: “There is little sign that, at the aggregate level, households are making an active effort to pay down debt more quickly than in the past.”

The Debt Crisis has not gone away

The impression, reinforced by David Cameron, that Britons are paying down their debts, is wrong. The debt problem is not going away. The Chancellor’s attempts to reduce the country’s debts have been blown off course. It looks as though the public never even set out on that course. But then, with the Bank of England and the Government implying that they never want base rate to budge from its record low of 0.5%, why would people rush to pay off debt? If they are offered zero interest to borrow on a credit card, why would they not want to take out some more?

“The only way out of a debt crisis is to deal with your debts,” said Mr. Cameron. But it isn’t happening, either at a personal level or at a governmental level. Instead of raising interest rates when they had the chance, the Bank of England gives the impression that interest rates will not rise for the foreseeable future. In cahoots with the government, they are happy to keep debt levels buoyant, even though our level of debt is the UK’s greatest problem.

Boosted by QE, the price of government-issued gilts have soared, depressing UK gilt yields to record lows. But the Germans are now having problems selling their bonds; if the Germans can’t sell government debt, can problems for British gilt sales be far behind? If foreign buyers desert UK gilts, the gilt bubble will burst. And it will make a deafening noise.

Interest rates won’t just rise, they will surge. Last year, 135,000 people went through some form of insolvency procedure. By the third quarter of 2011, the number had reached 91,000. If interest rates rise suddenly and sharply, insolvencies will soar.

Try as they might to blame it on the Eurozone crisis, this will be a home-made catastrophe.

Please Note: Information published here is provided to aid your thinking and investment decisions, not lead them. You should independently decide the best place for your money, and any investment decision you make is done so at your own risk. Data included here within may already be out of date.

About the Author

Jan SkoylesJan Skoyles is Head of Research at The Real Asset Company, a platform for secure and efficient gold investment. Jan first became interested in precious metals and sound money when she met Ned Naylor-Leyland whilst working alongside him in the summer of 2010. Jan then went on to write her undergraduate dissertation on the use of precious metals in the monetary system. After graduating from Aston University in 2011 Jan joined The Real Asset Co research desk. Her work and views are now featured on a range of media including BBC, Reuters, Wall Street Journal, Mail on Sunday, Forbes and The Telegraph. She has appeared on news channels including Russia Today to discuss the gold price and gold investing. You can keep up with Jan's commentary by subscribing to our RSS feed Gold Investment News.View all posts by Jan Skoyles