NB: THIS TRANSCRIPT WAS TYPED FROM A TRANSCRIPTION UNIT RECORDING AND NOT COPIED FROM AN ORIGINAL SCRIPT: BECAUSE OF THE POSSIBILITY OF MIS- HEARING AND THE DIFFICULTY, IN SOME CASES OF IDENTIFYING INDIVIDUAL SPEAKERS, THE BBC CANNOT VOUCH FOR ITS ACCURACY. ........................................................................ PANORAMA SPEND IT LIKE BECKHAM RECORDED FROM TRANSMISSION: BBC-1 DATE: 30:11:03 ........................................................................ JUSTIN ROWLATT: We've caught luxury fever. Interest rates have been at a record low, employment is at an historic high, house prices are soaring, and we're cashing in, borrowing the money trying to keep up with the Beckhams. The credit card companies are loving it. MARTIN LEWIS: They are sucking every possible customer they can in at the moment. There's a big war to get people to be in debt. It's exactly what they want because they make huge amounts of profit. ROWLATT: According to the government the borrowing boom has helped us spend our way clear of recession. But now the Bank of England is asking have some of us spent too much. MERVYN KING: Everyone needs to think carefully about the amount of debt which they can afford. ROGER BOOTLE: I think what's happened in this country is we've been engaged in a fantastic bubble in a great period of illusion when large numbers of people thought that essentially they could enjoy money for nothing. ROWLATT: Tonight on Panorama, how long can we continue to spend it like Beckham? FOOTBALL COMMENTATOR: Spend it like Beckham! ROWLATT: He's a legend of modern football but he's not just worshipped for his sporting prowess. David Beckham has long been a darling of the fashion world as well. We're not content to keep up with Jones'. Now we're trying to keep up with the Beckhams. Even a bogus Becks turns heads on the high street. An economist at Cambridge University has been researching British spending habits. Dr Clive Hamilton believes consumers have entered a new age marked by new aspirations. Dr CLIVE HAMILTON Economist, Cambridge University We're in an era now characterised sometimes as luxury fever. In a previous era people very much took their consumption patters from the people around them, you know.. in their neighbourhoods and in their suburbs. FOOTBALL COMMENTATOR: Oh! A stunning exit out of Louis Vuitton! HAMILTON: But nowadays people aspire to what they see on TV. They look at the film stars and the footballers and they want to spend it like Beckham. ROWLATT: The average income in Britain is £25,000 a year. David Beckham earns twice that every single day. Unlike the rest of us he can buy whatever he wants. HAMILTON: People have been borrowing like there are no tomorrows and the levels of personal debt in Britain are at historic records. They've never been like this. FOOTBALL COMMENTATOR: Oh marvellous, the mock mid field that balances the bags. HAMILTON: And of course the circumstances in which people have borrowed have been driven by low interest rates. The extraordinary ease with which people can borrow money and the desire of people to fund ever extravagant lifestyles. JUSTIN ROWLATT Many of us are, like Becks, touched by luxury fever. The problem is, very few of us have Beckham's cash. So just how easy is it to get the credit you need to spend it like Beckham. Panorama decided to put it to the test. If you really set your mind to it, how much credit could you run up? Well if anyone can help us find out, it's this man. Martin Lewis knows more about credit cards than possibly anyone else in the country. He's memorised the interest rates of 1,200 different cards and he can do compound interest in his head. MARTIN LEWIS Credit Card expert I probably take an interest in credit cards beyond anybody else does. I pride myself on knowing pretty much all the rates in the market, constantly reading terms and conditions. Everybody has different talents in life and I suppose there are some people who are musical and they can look at a score of music and they can hear the notes in their ear. Well I'm afraid when I look at credit card terms and conditions, I try and see if I can hear the loopholes. ROWLATT: So listen, I want to spend it like Beckham. Now I'm on about the average income so that's going to make it pretty easy for me to get credit presumably. MARTIN LEWIS: Actually, I've been through your finances and you're not exceptional if we're going to be strictly honest here. You've got a mortgage and a reasonable salary but you haven't had any debts in the past. I know that's good because you've got no bad debts. Not having borrowed can be a negative. ROWLATT: So what's the way to get credit then? MARTIN: You can get credit anywhere these days. Supermarkets, banks, football clubs will offer you credit cards. ROWLATT: Let's see what they're offering. [Telephone] Thank you for calling Services Club how can I help you? ROWLATT: Oh yes, could I apply for a Sainsbury's bank credit card please. Able to give you an immediate decision regarding your application, please wait, we're processing. Here it comes. Go for an Abbey National. [Telephone] Good afternoon, thank you for calling Abbey, you're speaking to Claire, how can I help you. ROWLATT: Hi ya Claire, I'd like to apply for a credit card. CLAIRE: Certainly. [Telephone] Thank you for calling. Your call is in a queue and will be answered shortly. ROWLATT: With a little time it's possible for people even on fairly modest incomes to build up huge lines of credit. Take Tony Aylen, he can spend over four times his annual income on his credit cards. TONY AYLEN I have eight credit cards with my salary of about £12,000 a year I have a maximum credit limit on one card of £10,000 graduating down towards my last one which is £1,500 which came with my new bank account. In total about £49,300. MARTIN: The credit card market is an entirely different beast to what it was 10 years ago. Then you had a credit card in your pocket it was preserve of the middle classes who could go out there and spend on it. Now pretty much everybody has credit cards. You can get a credit card if you don’t have a job and you're on income support. ROWLATT: Just like Karen Shone. KAREN SHONE I've got eight credit cards and eight store cards. Just over £12,000 credit with the credit cards and just over £12,000 credit with the store cards, which is just over £24,000 credit that I'm able to have. I was quite amazed at the amount of credit I could have, but it was just so easy to get them. LEWIS: There are thousands of people sitting there working out, scribbling on their little pads… "How can we get more money out of consumers? What can we come up with next that gives us an advantage over all the other credit card companies and puts more money into our pockets?" That's what they're trying to do, so you need to be clinical and rational and cool and think what do I need, is this the best card for me, and if you're not capable of doing that, or you're not prepared to give the time to do that, then steer clear of credit cards. ROWLATT: Few of us play the precision game and because borrowing has become so easy, Britons are building up a debt mountain. But should that worry us? RUTH KELLY MP Treasury Minister With low interest rates, the lowest rate for 40 years, we've the lowest level of unemployment since the 1970s, debt service costs are much, much lower, about 7% I think now compared to about 15% in the late 1980s. ROWLATT: But has there been a kind of gear change in the economy which means now that people can afford more debt? KELLY: It's certainly become much easier for people to take on debt and for them to service that debt. ROWLATT: But even in this benign economic environment some borrowers are already in too deep. NICK LORD Head of Money Issues, Citizens Advice The evidence we have from Citizens Advice Bureau is there is a significant and current debt problem in the UK. We've seen a 44% increase in the number of consumer credit debt inquiries over the past 5 years. A recent survey that we conducted showed that one in five of people were using credit in order to pay their household bills. And if you think about it, that shouldn't be happening at this stage in the economic cycle. Unemployment is low, interest rates have been low and people shouldn't be having repayment problems with regard to consumer credit. If people have been having problems, are having problems at the moment, it is going to be an awful lot worse in years to come. ROWLATT: Few people imagine they'll end up drowning in debt. Take Michelle and Tony Petti. After years of hard work they felt they deserved a taste of the good life. Eleven years ago they sold their Surrey home for a tidy profit and moved out here to the beautiful Somerset countryside. Apart from the mortgage they had no debts. There was no reason for the Pettys to believe that good times wouldn't continue. TONY PETTI: [in butchers shop] Hi, three sirloins please, really nice ones, yeah… MICHELLE AND TONY PETTY TONY: We bought good quality food as we fancied it. So if we fancy steak we go and buy sirloin. Or if we fancied um… MICHELLE: Duck, goose… TONY: I mean I love smoked salmon. MICHELLE: And I love prawns. TONY: And we used to buy the big crevettes for you, didn't we, which was really nice. MICHELLE: [Shopping] Wonderful, oh yes, goats cheese… yes, I love that. TONY: Shall we have some Cheddar as well? MICHELLE: Yes. TONY: We didn't go out of our way to spend or to buy articles or food that was expensive for the sake of being expensive. We just knew what we liked and we bought it. ROWLATT: So when you were in the supermarket and you were buying nice food and wine, presumably you reached into your pocket and too out the credit cards. MICHELLE: That's it. ROWLATT: And how easy was it to get credit back then? TONY: Ridiculously easy. Ridiculously easy. MICHELLE: Very easy. ROWLATT: In fact it's people like the Pettis touched by a bit of that luxury fever who've helped keep the economy afloat, borrowing in order to spend for Britain. ROGER BOOTLE Economist, Deloitte Over the last few years the world economy has been pretty close to recession and Britain's exporters have not been doing very well and investment has been low, and a lot of that has been that Britain has been in danger of sliding into recession itself. What's stopped it sliding has been the fact that consumers have carried on spending in excess of their income, and the only way they've been able to do that is by borrowing. Without that borrowing this economy would have been flirting with recession. ROWLATT: So credit has been the saviour of the British economy over the last few years. BOOTLE: Undoubtedly. ROWLATT: But all the while the Pettys, like so many British households, have been sinking deeper and deeper in debt. Tonight's dinner is on Panorama. TONY: You know you can afford the repayments but what you don’t realise is that gradually the repayments take over the money you have coming in, so in the end you're in the trap of using a credit card all the time because you don’t have any spare cash because you've spent your cash on the repayments for the credit card. MARTIN LEWIS Credit Card expert The ideal customer, the perfect credit card customer is someone with as big a debts as possible that they can just about afford to make the minimum repayments on at the highest rate possible because then the debt keeps going and the interest keeps adding up, you never quite pay it off but you never don’t pay it off by defaulting either. ROWLATT: So the expert advice is, don’t borrow on plastic. Take it from the man who runs Britain's biggest credit card company. 16th October MATTHEW BARRETT Chief Executive, Barclays Bank There's no question that credit card borrowing is an expensive way to do chronic borrowing. I would not recommend to anybody that they chronically borrow on a credit card. ROWLATT: Hold on a second, what did the Barclay's boss just say? BARRETT: I would not recommend to anybody that they chronically borrow on a credit card. ROWLATT: And the Pettys weren't just borrowing on plastic. They've taken out bank loans totalling £30,000 and have cashed in on the increase in the value of their house, remortgaging to pay off other debts. As for so many people, it all came to a head when their circumstances changed. Tony retired and Michelle had a motorcycle accident. Their dream turned out to be just that, an illusion. TONY: It was then that I realised that we had been living in a house of cards and it was collapsing and there wasn't.. you know.. there was nothing I could do about it at the time, and that's when I realised how stupid I'd been. ROWLATT: How much debt did you have? TONY: I couldn't say to the thing but it was around £58,000. ROWLATT: You'd run up £58,000 of debt. TONY: Mmm hm. ROWLATT: Basically just buying nice food, nice wine… TONY: Basically just living the way that we enjoyed living, yes. ROWLATT: It wasn't long before their creditors wanted their money back and they weren't very sympathetic to the Pettys' plight. MICHELLE: I was panicked. I really panicked. But there's just nowhere to go and it was like Big Brother, there was… everywhere you turned, every day the postman would come and you'd have letters. It came to the stage where I wouldn't open a letter. I couldn't open a letter because I just know all…… (emotional) Sorry. They've started making phone calls. It's just hell. It is, it's hell (breaks down crying) and you just don’t know what's going to happen. But if I hadn't of lost my job, this wouldn't… we wouldn't have.. we'd still be doing probably the same thing as we were doing a couple of months ago. BARRETT: I would not recommend to anybody that they chronically borrow on a credit card. TONY: You can't blame the credit industry. MICHELLE: No. TONY: You can't. They are there to make money and they will make money any way they can. Yeah, maybe they are ruthless. There's only one person to blame and that's the fool that takes the cards out and on this occasion that was me. MICHELLE: This is us. ROWLATT: The Pettys are determined to pay their debts back. They've renegotiated the payments. It will be 20 years before they're in the clear and in the meantime they've got just £30 a week to spend on food and drink. The days of easy money are well and truly over. Dr CLIVE HAMILTON Economist, Cambridge University It's ordinary Britons.. it's middle class Britons who've gone into hock in a way they never have before and that means they're vulnerable in a way they never have been before. Britons today should be more worried about their financial future than they've ever been, even though they're wealthier than they've ever been, because they're in far too much debt. ROWLATT: The look alike is loving it. HAMILTON: Because people have scaled up their lifestyle expectations, they have been competing against each other to buy bigger, grander, better houses, and so the asset boom, the house price boom has made people feel wealthier. ROWLATT: It's not surprising the middle classes feel wealthier. In the last five years alone house prices have doubled and record numbers of us are cashing in, increasing the amount we borrowed on our homes by remortgaging to raise extra money. In 1980 we borrowed a total of £52 billion on our houses. Now mortgage lending totals £737 billion. Ignoring inflation that's 14 times more. Home loans make up 80% of our debt. We are now taking out bigger mortgages than at any time since the boom days of the 1980s. If I came to you 10 years ago on the average income, say about 25 grand, no significant other borrowings, how much money would you be able to get me 10 years ago? RAY BOULGER Charcol Independent Mortgage Advisers Typically 10 years ago, 3 to 3 ½ times your income. So on a 25,000 income, up to 87,500. ROWLATT: Now if I came to you today on the same income, again, no borrowings, how much would you be able to get me now? BOULGER: Well in terms of lenders who will want to prove your income up to a maximum of five times depending on your personal status. ROWLATT: And say I came to you with a bit of a deposit? BOULGER: The more deposit you've got, the more that helps. Some lenders will offer higher multiples with a bit of a deposit and in particular there are some lenders who will not require you to state your income. So as long as you have a 15% deposit then we could get you a loan based on the value of the property. ROWLATT: So really the sky is the limit. BOULGER: Theoretically but obviously you've got to pay that money back. ROWLATT: It seems the lenders and their customers are in danger of forgetting that the good times don’t always go on forever. NICK LORD Head of Money Issues, Citizens Advice There is a very good chance that we are going to face problems just as severe as we did in the late 1980s. And the reason is this time round not only do we have people who have who have borrowed large amounts on their mortgages and they will have problems in repaying that, but unlike the 1980s we also have people who have borrowed exceedingly large amounts of money on their credit cards and their bank loans, and a combination of trying to repay high mortgage commitments but at the same time also repaying high unsecured consumer credit, the credit cards and the bank loans is going to lead to real difficulties for a substantial number of people. ROWLATT: You make it seem like we're facing really serious problems. LORD: I don’t think there is any doubt we are on the edge of a precipice with regard to the number of consumers who are going to have difficulties with regard to repaying credit over the next few years. ROWLATT: We're not just borrowing record amounts secured on our homes, unsecured credit is booming too. There's been an explosion of opportunities to borrow and that's exactly what many of us have been doing. Unsecured debts have grown 17 times to £168 billion and take a look at credit card debt. In 1980 we'd spent just over £1 billion on plastic, last month that total was £52 billion – 43 times more. If we get 'em all, I think we could easily be talking kind of Beckham style spending… MARTIN: For a day. ROWLATT: …which is what we want, but I still want more credit. It seems you can get a credit card from almost anywhere these days. British gas has a credit card company, so does British Airways. There's credit available in almost every high street store. This is the easiest money I've ever got Martin. MARTIN: It's not real money. It's debt. Oh dear, it looks like Panorama man has got a bad dose of luxury fever. The 37 year old Londoner is now trying to get some store cards, but he should be careful, they're pretty pricey, the Bank of England base rate is just 3 ½ % but most store cards charge nearer 30% a year! MARTIN: Hi Justin. ROWLATT: Oh hi Martin, it's Justin here. Listen, I've had a couple of cards through the post but I think I need a bit more credit. I've come down to Oxford Street. I was going to get some store cards, what do you think? MARTIN: Well I would never normally recommend store cards. Store cards are the devil's debt. Of around the 30 major ones on the market only three charge less than 25% interest. Having said that, what you're looking for is to get as much credit as possible and when they charge as much as they do, the thing they really want is to get their cards in your pocket. ROWLATT: Martin, all the cards have come through, yeah, I've got them here. MARTIN: Don’t do a thing. I'll be right there. ROWLATT: Hello Martin. MARTIN: How did it go, how many? ROWLATT: Well I think I did really well Martin. Six hours on the telephone, one visit to Oxford Street and I got myself £56,600 which is almost enough to spend it like Beckham. MARTIN: Yes, but there's more than one difference between you and David Beckham and that is when he spends it, it's his cash. This is their cash and looking through this, well average interest on these will be about 18%, £56,000. If you spend it and you do it wrong and you don’t do it precisely, they're going to make 9 ½ grand a year in interest out of you. Get rid of them. Look at this! Pass me those scissors, come on. ROWLATT: Come on Martin, those cards are worth a lot of money. MARTIN: 30% interest! Around 30% again! What else have you got in here? Another store card! 30% interest. The fact is, if you're going to use credit cards you do it with precision and you do it right. If you go spending willy-nilly, well you wont be spending it like Beckham, you'll be in debt. ROWLATT: But it's hard not to run up debt because these days we're sucked into the credit culture younger and younger. The debt habit is something many pick up in their first days at university. ANDREW CALDICOTT PhD CHEMISTRY STUDENT As soon as I walked through the door of the student union I had access to credit straightaway. The first thing I did was sign up to everything I could, just.. you know.. initially for the popcorn makers and free cash. When the first card came and I opened the envelope, it might as well have said.. you know.. free curry on the front because that's what it was. I mean it was free money and you went and spent it as if it was yours. ROWLATT: And as well as curry, there's no shortage of things to spend it on. There's rent to pay, books to buy and of course you need to relax every now and then. ANDREW: You go out, you drink beer and dance and go on the pull.. you know.. have a good time, you know. A lot of it I can't remember, so… ROWLATT: So it must have been a good time. ANDREW: It was a good time. ROWLATT: And his debts eventually totalled £37,000. He's probably the country's most indebted student. But most students leave with some debt. The current average is just under £9,000. So what happens when like Andy you simply can't afford to pay anymore? At just 25 years of age Andy Caldicott is in the process of making himself bankrupt. Some people say going bankrupt in your position would be walking away from your loans. They'd say you're responsible for borrowing that money, you should pay that money back. You shouldn't just walk away from it. ANDREW: Yes, I suppose they would. But bankruptcy is there to stop you being forced into more sinister ways of paying it back or to stop you turning to loan sharks or you being involved with crime or whatever. ROWLATT: Not so long ago a bankruptcy would have barred you from mainstream credit for life. No credit cards, no mortgages, nothing. So in three years time, when Andy has been discharged from the financial constraints of bankruptcy, will he be able to get back into the world of credit? If I came to you today and say I was discharged as a bankrupt, would you be able to get me a mortgage? RAY BOULGER Charcol Independent Mortgage Advisers The market today is totally different and if you've been discharged from bankruptcy today, yes we could now get you a mortgage as long as you've got a deposit. ROWLATT: You could get me a mortgage even if I was a discharged bankrupt? BOULGER: Correct. ROWLATT: Some people will think that's extraordinary. Why on earth would a company lend to a somebody who's been a bankrupt? BOULGER: Well a key factor is that they can charge a higher rate. The normal mortgage market is so competitive many lenders are losing money on their mortgages. This is a sector of the market where they can actually make a profit. Also, people who have been bankrupt generally speaking have learnt their lesson. They don’t want to go there again so they're better payers than you might think. ROWLATT: The fact is, for many lenders debtors make the best customers. The finance industry has a special name for customers who've had debt problems or find it hard to confirm their incomes, they call them sub-prime. It's a big market. Eight million of us are sub-prime, that's one in six adults. Stuart Pike has run up debts of almost £26,000. He owes money on his eight credit cards, he's got store card debt, bank loans, the whole credit circus. He's been a bit indulgent. STUART PIKE Information Technology You see a nice bit of kit, a new mask for your scuba and oh yeah, I'll invest in that, or a new set of fins or you pop out to the sales at HMV or Virgin and they've reduced a load of DVDs so you think oh yeah… ROWLATT: And put it on the plastic. PIKE: Put it on the plastic yeah. Convenient. ROWLATT: Do you pay it off at the end of the month? PIKE: Don’t intend to, no. ROWLATT: So you pay some of it off… PIKE: Pay some of it off, yeah, but obviously as the months go by it builds up a bit. ROWLATT: Now Stuart is battling to keep up the payments on his debts and he's been looking for a way to make them more affordable. He's taking the classic sub-prime route, consolidating his debts. [TV Advertising] Would you like to pay off all your credit cards and loans…. Are you financially fit… Looking for a loan company that listens to you and understands what you want? ROWLATT: The debt consolidation market barely existed five years ago. Last year it's reckoned it was worth £32 billion. Just watch day time TV. Debt consolidation loans - which tie up lots of smaller debts into one big loan - are the fastest growing sector in the sub-prime. The lender Stuart has chosen isn't a British based company although it's got a Stevenage branch. No, Household Bank is based in Prospect Heights, Illinois, and last year it made £90 million from its 3 million UK customers. Now British high street banks want to get in on the act. PHILIP MIDDLETON Head of Retail Banking Ernst & Young As the prime or the standard credit market place becomes more competitive, and therefore margins get squeezed, they have to look for other ways to keep profits rolling on and keep the share prices moving up. The sub-prime market, because it is, by definition higher risk, offers much higher margins and much greater profits in exchange for that risk. ROWLATT: The Americans have recognised just how profitable this market can be and have been snapping up British sub-prime businesses. But the traffic goes both ways, and now British banks are here in America shopping for their piece of the sub-prime action. After all, America has the most highly developed consumer credit market in the world and is home to the world's largest sub-prime lenders. HSBC, Britain's biggest bank, indeed the country's biggest company, has put its money on the table. [AMERCAN NEWS] Topping the news this hour, HSBC shareholders approve the global bank's $13 billion takeover of credit lender Household International. In March, HSBC spent its billions on… that's right, Household International, Stevenage Branch and all. [American Advertisement] This is my house this is my pride and joy. And though houses are hard to take care of, you have to keep it up. Sometimes you just don’t have the money. ROWLATT: Household is a huge company here in the States. It's lent $100 billion to some 50 million Americans. It's proved a very profitable business, but it has one of the worst reputations in American banking. [American Advertisement] … and I did it myself with the help of HFC BUSINESS UNUSUAL [CNN NEWS] Crack down on shady business practices continues in earnest. One of the nation's largest lenders will pay a record fine for deceiving its customers. Household International…. ROWLATT: Household was the subject of one of the biggest consumer protection cases ever fought. In December last year all 50 states and the district of Columbia reached an unprecedented settlement. Household International was forced to pay out almost half a billion dollars compensation following allegations of what is known as 'predatory lending'. DIANA L TAYLOR American Banking Regulator It's half a billion dollars and I don’t care how big the company is, half a billion dollars is going to make you sit up and take notice. ROWLATT: No limousines here. Household was criticised for charging customers in communities like this excessive fees. It would seek out people on low incomes who crucially owned their own homes and then hard sell expensive insurance products. Many customers complained they'd been misled about the interest rates they'd be charged. DIANA TAYLOR: This is absolutely heinous predatory behaviour on innocent people who end up losing their homes, they lose their livelihoods, they have to declare bankruptcy. It is horrible, heinous, predatory behaviour. ROWLATT: As part of the US settlement Household agreed to improve its lending practice. Not only that, HSBC says it's cleaning up Household even further. It is committed to making Household's practices a model for the industry. Back in Britain, Stuart has already borrowed £6000 from Household and was paying for an insurance policy to cover his payments. Then, in October, seven months after HSBC took Household over, Stuart Pike was offered another bigger loan from the company. How easy was it to take this loan out? STUART PIKE Very easy. I went into the branch, it was on Thursday evening and within an hour I'd signed on the line and they gave me the cheques to go and pay my existing finance. ROWLATT: You literally walked out with £15,000 that day? PIKE: Yes. ROWLATT: How did you feel as you left the shop? PIKE: It was a solution to my problem. ROWLATT: In fact Stuart had borrowed just under £14,500, but that wasn't the whole cost of the loan. Household had added almost £5000 for insurance. Stuart had taken out insurance on the loan, then another loan for more insurance and then insurance on that as well. In total Stuart has borrowed over £19,000. And when you take into account interest at 15.9% over 7 years, Stuart will be paying back £31,000. And don’t forget, Stuart's original loan was for just over £14,000. Consumer champion Nick Lord doesn't believe the unsecured household loan is the solution Stuart had hoped for. All he's done is exchange his old debts for a much larger loan which still carries a high rate of interest. I'm sorry to have to ask this in front of you Stuart but has Stuart been stupid? Has he been foolish taking out these loans? LORD: I think you can say that Stuart has been ill-informed and that if he had known more about the realities of taking out these loans I'm sure he would have taken a different decision. But I can't in all honesty say that Stuart is to blame for what he's done because he's been taken, I think, unfair advantage of by companies who have got more in line with regard to their profit margin rather than selling the product which is most appropriate for the borrower. ROWLATT: HSBC says that all Households customers are taken through a comprehensive discussion of what would be best for their individual circumstances. It says everyone is offered the option of insurance on loan products. It is up to the client whether they take it out or not. The government says people like Stuart are the exception. Most of us can afford to service our debts. But borrowing is expected to get more expensive. Has the era of record low interest rates come to an end? PHILIP MIDDLETON Head of Retail Banking Ernst & Young The expectation in the city is that interest rates over the next 12 to 18 months will tend up towards about 5% which is quite a significant increase. There are some who think that it will go up as far as 7% which is the historical average rate of interest in Britain since 1945 although I think that's highly unlikely. Now if that does happen, and if it's accompanied by unemployment and falling house prices, then the impact on an awful lot of UK households is going to be very severe indeed. ROWLATT: And if mortgage rates go up, house prices are likely, at the very least, to stop rising. If you can't afford to borrow so much money then you wont be able to pay so much money to buy the property you want. ROGER BOOTLE Economist, Deloitte The increase in house prices over the last few years has been quite extraordinary. It's greater in real terms than at any previous surge in house prices that we've been through and we've been through quite a few. Now on every one of these occasions, the early 70s, the late 70s, the late 80s, we've had the same old arguments rolled out, effectively: "You don’t understand, it's different this time." People have enjoyed this fantastic burst of illusory wealth, money for nothing, doing nothing, wealth rolling in, and then hey presto, bang, the adjustment has come, the bubble has burst and in real terms house prices have fallen, and in the early 90s they fell in money terms as well, leading to negative equity. I just think this is another example of exactly the same thing. ROWLATT: Earlier this month the Governor of the Bank of England warned of problems ahead for some debtors. 12 November 2003 MERVYN KING Governor, Bank of England There is a risk that some heavily indebted households will be badly affected by changes in economic circumstances or interest rates. Everyone needs to think carefully about the amount of debt which they can afford. ROWLATT: What the Governor of the Bank of England is saying is that he anticipates that it's likely to increase in the coming years because that's when interest rates are likely to go up. RUTH KELLY MP Treasury Minister Well clearly we've got to be vigilant but interest rates are at their lowest level for 40 years and we do have a culture of stability and no one is predicting that suddenly interest rates are going to increase markedly and sharply as they did in the late 1980s. ROWLATT: But proportionately that's exactly what the market is predicting, isn't it? At the moment we've got interest rates at 3 ½ %, the market is saying they're going to increase to over 5%. That's 1 ½ % increase, that's a third, that's an increase of a third. That's a big jump. KELLY: Well at the moment people are paying back just over 7% of their income, of their disposable income, in debt servicing costs and I don’t think anyone is suggesting that that's going to go back to the levels that we saw in the late 1980s of around 15%. ROWLATT: Well that was the absolute peak, but if debt service costs go up by a third which is what is indicated by interest rates over the next year, then they're likely to be paying something like 10% of their income. Now that's a very large proportion of their income. KELLY: It is but it's not the only factor that it's necessary to take into account. People also have to take into account whether their employment is secure. That's a very large and contributory factor to how confident people feel about the future and we do have the lowest level of unemployment since the 1980s. ROWLATT: When you really can't pay or wont pay your debts, these are the people you'll end up dealing with. This really is the sharp end. But the debt collection business has evolved in recent years. They're now dealing with a different class of clientele and they've had to change tactics. These days debt collectors work from call centres. SCOTT SOUTAR President, Credit Services Association A lot of people still think of Vinny Jones and people walking around with baseball bats but that's far from the truth. There seems to be more debt coming from the middle class people in the UK who appear to be running up more debt than before purely to fuel a better lifestyle for themselves. ROWLATT: Which has been great for their business. Debt collectors are chasing a total of £5 billion a year on 20 million individual debts. SOUTAR: This is a numbers game. You know.. credit has increased, we're talking about retail credit being in excess of £10 billion in the month of September and that's the highest it's ever been in history and we're looking at a total debt in the UK now reaching almost a thousand billion pounds. It's a staggering amount. ROWLATT: So what's likely to be the consequence of all that credit out there? SOUTAR: Well I think it's serious enough that we're going to see a significant increase in business in the debt collection industry in the next 13 months. Possibly by that time mortgage interest rates will have gone up and perhaps we will see an increase from 6 million to 7 million households in the UK experiencing financial difficulties. ROWLATT: One million new households experiencing financial difficulties having debts that are going bad? SOUTAR: That's correct. ROWLATT: Interest rates may have nudged up a quarter of 1% but that doesn't seem to have taken the edge off the nation's luxury fever. We're still borrowing and spending at record levels. Last month we borrowed another £10 billion. Mortgage lending was up 15% on the month and our Christmas credit card binge is expected to make 2003 a record year for spending on plastic. We're already up 38% on 2002! ROWLATT: It looks like Britain is still spending it like Beckham. _______ www.bbc.co.uk/panorama In the New Year the BBC is holding a special day of programmes on debt. Financial experts will be on hand to give advice on your money problems. If you'd like to take part please contact us on Freephone 0800 888809 more details on our website, and the discussion of luxury fever continues now on Five Live. CREDITS Reporter JUSTIN ROWLATT Football Commentator JONATHAN PEARCE David Beckham Look-alike DANIEL DEMANT Camera STEPHEN FOOTE ROSS KEITH DAVID CORFIELD Sound TONY PASFIELD MARTIN JACKSON SEAN O'NEIL Aerial Photography COLIN HAZELWOOD VT Editor BOYD NAGLE Colourist STEVE LUCAS Dubbing Mixer DAMIAN REYNOLDS Production Co-ordinator ROSA RUDNICKA Production Assistant SOPHIE LHERNOULT Web Producer ADAM FLINTER Film Research KATE REDMAN Research AMANDA VAUGHAN-BARRATT Graphic Design KEY YIP LAM ALEX NEWBERY Production Manager GINNY WILLIAMS Unit Manager LAURA GOVETT Film Editor SIMON THORNE Assistant Producers SHABNAM GREWAL DAVID BAXTER Director GERRY TROYNA Producer ANDY BELL Deputy Editors ANDREW BELL SAM COLLYNS Editor MIKE ROBINSON 2 _____________________________________________________________________________________________ If you have any queries regarding this programme, please email: panorama@bbc.co.uk