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Last Updated: Monday, 14 November 2005, 10:54 GMT
Feckless borrowers confess sins?
Ian Pollock
BBC News personal finance reporter

Most people who use Individual Voluntary Arrangements (IVAs) to escape insolvency admit they have been living beyond their means.

Patsy & Edina
Some people are definitely reckless spenders

Their confessions are pinpointed in research on the credit card industry from the accountancy firm PricewaterhouseCoopers (PwC).

The report also suggests card issuers may start charging annual fees again.

PwC says this is due to the industry's profits being squeezed by regulation, "rate tarts", and bad debts.

Are credit cards and their lure of easy spending the reason for some people borrowing too much and going bust?

The argument has been going on ever since Barclaycard launched the UK's first credit card in 1967.

It seems there may indeed be an irresponsible minority for whom a card is a plastic pathway to financial perdition.

And some of them have been uncovered by PwC.

Living beyond their means

Its insolvency experts looked at 80% of the IVA applications made in July this year.

They assume that because lenders are prepared to offer them the credit they must be able to repay it
Pat Boyden, PwC

The IVA procedure is a formal alternative to declaring yourself bankrupt and is aimed at people who can pay something to their creditors each month, rather than nothing at all.

Of the 1,257 IVAs examined that month, 75% of the debtors put down " living beyond their means" as the main reason for being in trouble.

Only 20% said they had lost their jobs or had suffered a breakdown in their marriages - two of the events traditionally assumed most likely to trigger personal insolvency.

"It implies there are two classes of borrowers," says Pat Boyden, head of personal insolvency at PwC.

"Those who consistently pay off their debts; then there is a revolving population of people who don't do that but occasionally fall off the conveyor belt."

But why exactly do they borrow too much in the first place?

According to Boyden "they assume that because lenders are prepared to offer them the credit they must be able to repay it. They don't stop to think. It is irresponsible borrowing, not irresponsible lending".

Many creditors

Of those studied, PwC found that the average debt was 60,000, typically owed to 11 different creditors, on credit cards and other unsecured forms of lending.

Banks and other issuers are regularly castigated for sending out mail shots in their millions with credit card application forms, and even blank cheques, encouraging the recipients to borrow more and more.

But lenders would like us to believe that its bits of plastic are in fact a thoroughly responsible method of spending.

Recent research by the industry body Apacs showed that 93% of all credit card borrowing in 2004 was repaid within the year.

And 73% of the borrowing was by people who paid off their credit card bills in full within the month.

Drowning in debt

The accusation of irresponsible lending is hard to shake off though.

They are like bartenders, knowingly serving alcohol to people who are already drunk
Antony Elliott

In March this year a former banker Antony Elliott published some research based on in-depth interviews with 36 families and individuals who had severe debt problems.

His report "Not waving but drowning" was published by the Centre for the Study of Financial Innovation.

It recommended making it illegal for banks to knowingly over-indebt their customers.

He said of the banks: "They are like bartenders, knowingly serving alcohol to people who are already drunk".

Accusing the industry of reckless lending, he identified 15 different reforms to bring it to a halt.

Among them were that no lender should increase a borrower's credit limit without their specific consent; and that a loan should not be legally enforceable if it has been made to someone who is clearly over-indebted.

Industry under pressure

The increase in bad debts among credit card customers, reported by several big banks this year, is just one of the problems for the industry highlighted by PwC's research.

The profitability of the plastic card business has also been hit by rate tarts, people who move their borrowings around from one interest free offer to another.

PWC calculates they have cost the banks 600 million in lost revenue in the last year.

Meanwhile, almost every aspect of the industry's profitability has been scrutinised by regulators.

They have criticised penalty charges for late payment, the high levels of interest charged on store cards, and the processing fees levied on retailers by the banks and the two main card companies VISA and Mastercard.

Add in the ferocious competition for new customers, and it has meant a squeeze on the profits of the whole industry.


PwC's prediction is that all these factors will force the credit card issuers to revive a charging practice that faded out a few years ago: annual fees.

At least that would be a transparent charge, on which customers could make a clear judgement, unlike the notoriously opaque methods for calculating the interest rate, known as the APR.

The banking industry body APACS suggested in September that in the next year or two the amount of money being taken out on credit cards may fail to grow, for the first time.

They are being rapidly overtaken in popularity by debit cards.

With banks increasingly sharing information about how much they have lent to customers, it is quite possible fewer people will apply for cards and fewer will be given them.

In the eyes of some, that would be a jolly good thing.

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