|OVERINDEBTEDNESS – UK poor have debt-to-income ratios of >300%. Bankruptcies and write-offs on credit card loans rise, increased borrowing costs for the poor ahead.
|SOUNDING THE RETREAT
(Jul 13th 2006 from The Economist)
THE BANKS PULL BACK ON CONSUMER LENDING
It could not have been clearer that consumer lending was out of control in 2003, when the Royal Bank of Scotland offered Monty Slater a credit card with a £10,000 ($16,300) limit and the chance to earn air-miles. Monty was, according to his owner, a “lovely shih-tzu” dog.
Encouraged by a decade-long housing boom and low interest rates in recent years, the British have borrowed with abandon. In June 2004, for the first time, total consumer borrowing exceeded the £1 trillion mark, roughly the equivalent of the country's economic output that year. Most of the debt is secured against mortgages. But borrowing has been rising fastest on credit cards, overdrafts and small unsecured fixed-term loans.
On July 12th, in its half-yearly Financial Stability Review, the Bank of England listed household indebtedness as one of six vulnerable points in the financial system. It has increased from about 100% of annual disposable income in the 1990s to around 150%, it said. And much of the lending appears to be going to those who can least afford to pay it back.
Citizens Advice, a charity, sees some of the worst over-indebtedness in some of the country's poorest areas. The 1.3m cases it deals with each year are brought by people who typically have household incomes only half the national mean. Yet those who turn to the group for help owe an average of £13,150 ($24,300) apiece. That figure has increased by nearly a third over the past three years and is now more than 17 times monthly household income.
The Consumer Credit Counselling Service, another charity, has found that low-income families are generally more highly leveraged than those with higher incomes. A survey of its clients showed that those earning less than £10,000 a year had average debts of £20,316, or 3.3 times their annual income. Those earning more than £30,000 a year, by contrast, had debts of £69,737, but a debt-to-income ratio less than two to one.
Small wonder then, that personal bankruptcies jumped by 51% to 15,389 in the first quarter of this year from the same period a year earlier, encouraged by new laws that make it easier for people to rid themselves of debt by declaring themselves bust. Write-offs on unsecured loans have also jumped sharply
Most of those declaring bankruptcy have few assets; people with significant possessions tend to lose them when they walk away from their debts and so have a powerful incentive not to do so. For that reason arrears on mortgages tend to be low, though they too are rising. Creditors' applications to repossess houses increased by 29% to 33,442 in the first quarter of 2006 from the same period a year earlier.
The rise in bankruptcies is prompting banks to tighten their lending criteria and increase the rates they charge customers with spotty credit records. Consumers, too, want to cut back. A study commissioned by Alliance & Leicester, a small British bank, found in January that more than half of those surveyed planned to reduce their borrowing. Credit-card balances, growing at an annual rate of about 25% for most of 2004, increased by only 6.4% in April, the Bank of England says.
This change in mood comes not a moment too soon. As recently as December the Bank was worrying that banks' write-offs of unsecured loans were equal to a fifth of their profits and likely to rise. It has taken comfort from the slowing growth in these loans—only to fret now that company borrowing is soaring.
If Monty's credit card represented the consumer-lending bubble at its most inflated, then another absurdity may be a sign that sanity is returning. Mark Thomas, an investment analyst who regularly gets new credit cards to take advantage of special promotions, says that he was recently denied a card because a check showed he already held several. The decision to deny him credit “was conservative”, Mr Thomas wrote in June. “Many investors may find that comforting.”
(Below is the report on debt in England and Wales published by Citizens Advice, and the study on debt and income released by the Consumer Credit Counselling Service)
Created: 18/07/06. Last changed: 18/07/06.
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