Credit card boom warning

Card spending accounts for 8.5% of GDP in the UK

British people spend more money on their credit and debit cards than anyone else in the European Union, according to a report by the Credit Card Research Group.

During the last month of 2000, UK consumers spent £17.5bn on credit and debit cards, about 24% more than the previous December

Card spending accounts for 8.5% of all goods and services produced in the UK.

This compares to less than 1% of the gross domestic product (GDP) in France, Germany or Italy, the report said.

This is good news because it makes the UK card market more competitive, the report suggested.

But the flipside is obvious: credit cards often make it far too easy for people to live beyond their means.

Since Christmas, debt counsellors have seen the number of calls for help from people who are in financial difficulty double compared a year earlier.

The American dream

The Americans are pretty keen credit card shoppers too, and they have been increasingly financing cars and other big purchases on credits.

Consumer credits rose at a faster rate than expected in November, up by 10.2% compared to a year earlier, the US central bank, the Federal Reserve, said on Monday.

Not all credit customers borrow to shop, however.

In the US, in particular, a growing number of people have been borrowing to invest in shares to take advantage of the past years' rally in the stock markets.

Financial advisers warn strongly against doing this, not least because it will be difficult to make any money this way - even when share prices are rising.

The value of a share would have to rise more than the cost of borrowing to bring any gains to the investor.

Many credit cards charge double digit interest rates, and similar returns on equities are hard to achieve.

Excess credit

But more importantly, perhaps; excess credit availability in an economy increases demand - for goods and services, as well as for investments in property or in shares.

If demand rises and supply stays static, prices will rise.

The danger is that these higher prices are built on a foundation of debt, debts which have to be repaid at some time.

With such weak foundations, as investors have found to their cost over the years, any economic downturn can swiftly reduce the value of shares or property.