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Out of our debt

It is difficult to remember the world that existed before the introduction of credit cards in the UK. Barclays was the first and that was over 40 years ago.

Current accounts were still relatively new for most of the population. People had been paid weekly in cash and their need for bank accounts was minimal. Any surplus income was lodged as deposits in the savings banks or the Post Office.

For those needing credit, this would normally take the form of hire purchase agreements for bigger purchases and there were credit agents or “tally men” who could advance small sums. These firms employed people to collect repayments, often on a weekly basis.

Forty years on, we have a society which carries consumer debt of over 1.2trn and credit has become firmly established as the means by which most people conduct their financial affairs. Borrowing is freely available and the introduction of student loans and university fees has resulted in more young people being dependent on credit.

We have enjoyed periods of benign interest rates, living standards continue to improve and it can be argued that there is no reason why this level of debt cannot be sustained. Consumer assets continue to exceed debt by a ratio of 5:1and bad debts as a proportion of total lending are small. Perhaps everything at the macro-economic level is OK.

However, there is a very different side to this story. In the second quarter of this year, a record 26,000 borrowers filed for bankruptcy and the trend is strongly upwards. It has been estimated that two million people are facing irreversible financial problems and the FSA has reported that over three million face a constant struggle to keep up debt repayments.

The blame lies in many areas. Growing property values have given individuals sometimes false impressions of well-being, prompting them to borrow beyond their income. Lenders could have been more careful with their lending decisions. This issue is now being addressed as banks recognise the danger signals in the 3.25bn of bad debt reported in their last half-year figures.

Another aspect which must be addressed is the understanding consumers have of financial products.

  • A quarter of the population do not understand percentages. There are examples of where a card with a high rate is considered better than one that is zero-rated.
  • Half do not know the meaning or purpose of APRs.

    Understanding these basic elements is vital and steps must be taken to ensure that all school leavers have basic financial capability. Lenders and professional bodies are working closely with the education authorities to rectify this situation.

    Progress will take time and those outside full-time education will need help and support. A degree of help is being made available through a variety of channels including Citizens Advice Bureaux and debt councillors but will this meet demand?

    The message to financial advisers is to be very conscious of the difficulties that some customers experience. When products are being explained, we need to ensure that the important factors are fully understood. Giving clear explanations will maximise the confidence of the client and minimise the chance of an improper sale, with the associated difficulties these often create in the future.

Richard Fox is chief executive of the Society of Mortgage Professionals

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