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EDITIONS
 Tuesday, 14 January, 2003, 06:16 GMT
How debt lured us into trouble
US financial institutions brought their ideas across the Atlantic

As part of a week-long series on debt, Stuart Cliffe of a consumer action group charts how UK consumers fell under the spell of US lenders.
Why have Britons succumbed so readily to debt?

In short, we have been tempted.

If we can not afford something it is not only possible, but almost obligatory to charge it now and pay later.

Open in new window : Debt ridden Britain
How much do we owe?

Got into a little bit of a debt problem? Don't let that interrupt your credit spree, the banks say.

US providers invaded our markets in the mid 1990s, coinciding with a housing boom and greater economic prosperity

Every other television advert is about debt consolidation, remortgaging, equity release, or taking out more loans to pay off the debts you have already incurred.

US invasion

It may seem quite strange that financial service providers should be so keen to lend more to customers already in trouble, but it is a big and very profitable business. US providers invaded our markets in the mid 1990s, at a time of housing boom and greater economic prosperity.

Put simply, there are some lenders out there who repossess the borrower's property first and ask questions never

They brought with them new aggressive marketing techniques - such as low introductory interest rates and high credit limits - that left domestic credit card providers standing.

Faced with vanishing market share, domestic credit providers soon followed suit and, as a result, the UK is now at debt boiling point.

Danger to homeowners

In particular, lenders have been targeting homeowners that have built up hefty credit card debts and personal loans.

Mortgage equity withdrawal - the amount of extra money taken out by borrowers when they remortgage their houses - increased from 10bn between April and June 2002 to 12bn in the July to September period.

In return for lower rates, homeowners have to secure the debt against their home.

This is a strategy riddled with dangers - first and foremost the risk that if borrowers fail to keep up repayments they can lose their homes.

Repossession

I have encountered several cases of borrowers losing their homes for the sake of a debt of just a few thousand pounds.

Put simply, there are some lenders out there who repossess the borrower's property first and ask questions never.

A hand catching money
Lenders stand accused of 'irresponsibility'

In addition, homeowners that borrow against their property forget that they have to repay any debt before they can move.

If house prices fall and the economy turns sour, then borrowers could find that their extra secured borrowings push then into negative equity.

If you're not a homeowner you can still probably find deals, although at higher interest rates because of the increased "risk".

Insurance risk

But borrowers are often persuaded to purchase expensive insurance policies to protect repayments in case of illness or unemployment.

However, in many cases these polices are so couched in double speak and get out clauses that when it comes time to claim, consumers can find that they have little to fall back on.

The UK may have aped the US on the credit side, but in one respect we are not playing follow the leader - consumer protection.

Legal actions are already in progress in some US states against credit card companies that through irresponsible lending have encouraged customers into a debt trap

US credit consumers do better than their UK counterparts.

Consumers have the Truth In Lending Act, the Equal Credit Opportunity Act and the protection of an Unfair Debt Collection Act to try to ensure a level playing field.

In addition, the Fair Credit Billing Act requires that errors are investigated and corrected quickly.

There is a responsibility for lenders to "know their customer", and legal actions are already in progress in some US states against credit card companies that, through irresponsible lending, have encouraged customers into a debt trap.

US consumers have real power to their elbow while in the UK we rely on the 1974 Consumer Credit Act - a piece of legislation that has little to do with the new debt reality.

BBC News Online is running a week-long series on dealing with personal debt


Debt busting

Analysis

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