The truth about debt

It’s hard to get a handle on the true picture on debt. Citizens Advice and other debt and debt education charities are saying that consumer debt is going up, a view echoed by the increasingly successful debt management and debt consolidation companies, who are seeing increasing calls for Individual Voluntary Arrangements (IVAs) which help people to repay some of their debt. Other recent research shows that Brits are carrying twice as much credit card debt as their West European neighbours.

But it’s not all doom and gloom. Research from Alliance and Leicester suggests that this year could be the first one in which credit card borrowing falls. In the last 10 years, credit card borrowing has grown at a whopping 10 per cent a year – that’s a lot of spending sprees. But it seems that now the trend is reversing, with growth of just 1.4 per cent in the year to date. To add to the good news, the growth rate is below earnings growth (4.2 per cent a year) and also below inflation (either 2.4 per cent or 3.6 per cent a year, depending on the measure you use).

Maybe consumers are finally taking heed of the debt warnings, instead of going for the consolidation loans pushed by Carol Vorderman and other celebs. The banks survey revealed a clear intention to reduce credit card debt in the next six months. At the start of the year 61 per cent of people said they were going to reduce their credit card debt – and at least some of them have kept their word. In January, average credit card debt per household was £2,243. This has now fallen by £103 to £2,140.

Can this trend survive Christmas? Well, the trend suggests that overall borrowing on credit cards at the end of this year will be between £54.5 billion and £56 billion. The last time it was this low was October 2004. It would also be the first decline since records began 20 years ago.

Alliance and Leicester say there’s a cultural shift, with more people choosing IVAs as a kind of ‘get out of debt free’ card. But the bank warns that this could affect future credit, so it’s a good sign if people are starting to pay their debts instead.