Where does the credit go?
20/03/2008
From October to December 2007, UK residents spent £32.4 billion on credit cards, says APACS, the Association of Payment Clearing Services. Approaching £700 per adult, this was the second-highest total for any three-month period in history.
Of course, high spending around Christmas time isn’t necessarily something to worry about. It could just be a sign of a healthy economy, full of people with the cash to enjoy themselves in the festive season.
What’s worrying is this: this rising credit card usage wasn’t matched by a rise in retail spending around the end of the year – a ‘traditional’ cause of high credit card bills in December. If the money wasn’t spent on Christmas treats, then people were probably using their plastic more to pay for household expenses.
Using credit
Millions of people use their credit cards all the time. It’s a convenient way of paying for just about anything, just about anywhere, whether in person, online or over the phone. As long as they can pay off enough of the balance quickly enough to avoid interest charges and mounting debt, this kind of credit isn’t a problem, as it means people are choosing to use it.
The problems arise when people are forced to use their credit card to pay for basic living expenses like food. It could be one of the first steps on a slippery slope into unmanageable debt. Basically borrowing from next month’s budget, people are storing up problems for the future. Each month, their finances are stretched even further as they pay for last month’s ‘overspill’ – plus interest.
Shifting credit
Across the UK, millions of credit card users are avoiding interest by using 0% balance transfers as a kind of ‘do-it-yourself’ debt solution. According to a study by Sainsbury’s Finance, the first half of 2008 could see more than £6.6 billion transferred between credit cards. Switching cards seems particularly popular in the south west of England, where 15% of credit card customers are likely to switch.
When it’s done well, this can be a sensible way to avoid interest charges – but there are drawbacks.
First of all, most card providers charge a handling fee of around 2-3% for this, so consumers need to be careful with their calculations and make sure they’re not spending more than they save. A 3% handling fee means that shifting £4,000 would cost £120.
Second, this should never be seen as a solution to debt. If someone’s really struggling to make their monthly payments, they might need to consider a debt solution like a debt management plan or an IVA (Individual Voluntary Arrangement). And even if they’re not struggling, just making the minimum payments can mean it takes far longer than expected to pay off their debt. Although they won’t be paying interest if they can keep finding 0% deals, that does involve switching (and probably paying to do so) every 12 months or so.
Finally, the credit crunch is making it harder and harder for people to get access to credit, especially those with the most serious debt issues. This could really add to someone’s long-term debt problems – if they can’t find a new 0% deal (and they can’t pay off their balance), they might find their credit card debt starts growing at an alarming rate.
2008 – what’s on the cards?
We won’t know the figures for the first quarter of 2008 (January - March) until sometime in April, but the growing number of refused credit card applications isn’t the only reason to expect a decrease in credit card use.
Despite the increase at the end of 2007, overall credit card debt has actually dropped slightly, coming down from £55.6 billion to £54.9 billion in the last 12 months, according to independent financial adviser website Unbiased.co.uk.
And a recent Alliance & Leicester report found that fully 50% of respondents had recently spoken to friends about debt problems. It’s a good sign when people start talking about their debts. Listening to their friends can teach them a lot about the warning signs and pitfalls, and about the debt solutions (e.g. debt consolidation, debt management and IVAs) that might help them get their finances in order and break the cycle of over-reliance on high-interest credit.
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