by Nick Lord
Head of Money Issues, Citizens Advice
A recent survey by Citizens Advice Bureaux showed that one in five people are using credit to pay for everyday household bills.
One in four have no idea how much they owe.
Furthermore nearly half of those surveyed would need only a small change in the circumstances to turn their use of credit into unmanageable debt.
Citizens Advice are by no means alone in sounding the warning bells about debt: The Financial Services Authority estimate that over six million households are finding it difficult to meet their debt repayments.
Meanwhile, research for the Department of Trade and Industry shows that one in 4 people experienced financial difficulty in the past 12 months and one in 5 are in current financial difficulty.
So what has gone wrong? The current low level of unemployment and the record low interest rates over the past five years means that debt problems should actually be reduced over what we have seen in the past.
If we do have a growing problem at this stage in the economic cycle, what hope when interest rates and unemployment rise, as they surely will?
The big change, of course, is the growth in consumer credit. Relaxations in the control over lending to consumers in the 1980's, the sale of council houses and growth of home ownership, the entry of aggressively marketed US lenders into the UK consumer credit market, the booming property market and crucially, the overall change in public attitude to the use of credit, have revolutionised the personal finance sector.
In the long term, greater consumer access to credit is a positive development. The UK consumer credit industry is vigorous and innovative.
The fact that banks, credit card companies, mortgage lenders, and others have so dramatically extended their range of products has had undoubted benefits for consumers.
What happens if house prices fall?
We now have a far greater ability to borrow money, to bring forward spending or to even out fluctuations in our income and expenditure. We can choose to spend at a time when we and our families would receive most benefit from the spending rather than having to save up.
Undoubtedly there have also been wider economic benefits as consumer spending fuelled by borrowing has maintained economic growth, and thus supported employment levels.
However, additional freedom to borrow has promoted an unsustainable short term approach to spending through credit.
For consumers to make an informed and rational choice in using credit requires a combination of consumer education, information, and access to independent advice.
The reality is that consumer education and information on credit and debt has not kept up with industry developments and consequently consumers are making borrowing decisions that are not rational, informed, or in their long term interests.
The 'spend now, pay later' approach seems fine in the current 'spend now' phase. It won't be so much fun when the price of borrowing has to be paid, particularly when today's indebted consumers will not benefit from the low levels of inflation that made repayment of borrowing less painful in the past.
Citizens Advice expect to see debt enquiries increase significantly over the next twelve months. The rate of increase will depend on several factors of which the housing market is probably the most critical.
70% of UK households are now homeowners and booming property prices has resulted in record levels of mortgage lending, about half of which has been remortgaging.
Much remortgaging involves debt consolidation where unsecured debt is swapped for mortgage debt. But these repaid unsecured accounts soon accumulate new spending such that the borrower ends up with both a higher mortgage and an exposure to unsecured debt.
It is these borrowers who are most at risk from higher mortgage rates. If house prices do start to drop back, as many predict, some of the mortgage lenders who have lent at high income multiples at high loan to property price ratios will want to take early action to protect their commercial position.
That means more repossessions. The Council of Mortgage Lenders is aiming for repossessions to average out at 30,000 each year over the economic cycle.
This year, the number of repossessions will probably be less than 9,000. How much more of a steer can there be that it is going to get much tougher for those who have high mortgages coupled with unsecured debt?