Tuesday, November 10, 2009

Credit card care 'too late'

car insurance

New-found prudence on credit card debt may have come too late, a survey has found, as credit card borrowing falls but debt continues to rise.

Borrowing through credit cards has fallen by 3% to £64 billion, PricewaterhouseCoopers reported, while the amount of cards in circulation fell by 8% to the same levels as 2003.

Credit card use fell 27% during 2008, the UK Cards Association said, while debit card spending rose by 9%.

PwC claims that the drop in card usage is being driven by a combination of lenders reducing the availability of credit and consumers being less willing to take on more debt.

But many people have already taken on such high levels of debt that even without new spending they are still struggling to pay back what they owe.

Credit card repayments have outstripped new spending every month since early 2006, according to the British Bankers' Association.

But despite this, outstanding plastic debt has continued to rise nearly every month during the period, due to the impact of interest and charges on the money owed.

There are also signs that although overall borrowing levels are falling, the drop in the number of cards in circulation has actually led to an increase in average debt per card. The amount owed per card rose by 5% during the past year to break through the £1,000 barrier for the first time.

The average amount of unsecured debt, including loans, store cards and overdrafts, that households owe, now equals 40% of average net household income.

In the past, people have been able to borrow their way out of debt, often consolidating credit card balances into personal loans, which charge lower interest rates, or unlocking equity from their property to pay off credit cards and loans.

But the credit crunch has largely put an end to this. Tighter lending criteria have made it harder for people to qualify for loans, while falling house prices mean many homeowners no longer have sufficient equity in their property to use it to repay their unsecured debts.