Britain's £1 trillion debt mountain

HOUSEHOLD debt smashed through the £1 trillion barrier for the first time yesterday as consumer groups warned that six million families across Britain are struggling to keep up with repayments.

The Bank of England (BoE) said that consumers now owe 1.004 trillion through mortgages, personal loans, overdrafts, hire purchase agreements and on credit cards. This represents 16,700 for each man, woman and child.

British household debt is now equal to the total amount owed by Africa, Asia and Latin America to international banks and through loans from other countries.

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Borrowing increased at a rate of around 1 million every four minutes during June, soaring by 11.23 billion.

The majority of the 1 trillion now owed is secured on property, with 827.31 billion owed through mortgages, while 55.1 billion is owed on credit cards and 121.88 billion of outstanding debt through other unsecured lending.

The spend-now-pay-later frenzy has soared in recent years due to a combination of low interest rates, rising house prices and low unemployment, which have boosted consumer confidence.

But debt experts and MPs warned that people could be storing up problems for the future, with interest rates now rising and debt repayments increasing.

Shadow chancellor Oliver Letwin said: "It took 600 years of banking history for household debt to reach half a trillion pounds. Now, under seven years of Labour, this has doubled. What else can we expect from a government that persistently attacks pensions and has decimated the savings culture?"

Citizens Advice has seen a 44 per cent increase in the number of people seeking help for debt problems over the past six years. "We have been warning for some time that personal debt problems threaten to overwhelm large numbers of people," said Teresa Perchard of Citizens Advice.

But the BoE’s monetary policy committee, which has previously expressed concern over the level of personal debt, yesterday sought to play down fears of a debt "time bomb". Its chief economist, Charlie Bean, said more people had chosen to borrow money to invest in houses and other assets rather than fund a general spending spree, and higher interest rates would spell trouble for only a fraction of households.

Interest rates have increased four times since November, taking the base rate to 4.5 per cent, in an attempt to restrain inflation and consumer spending, and cool the housing market.

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But this gradual strategy has failed to have a meaningful impact on consumer behaviour. A report released yesterday by the Nationwide showed that house prices soared by 2.1 per cent during June, pushing annual price growth above 20 per cent and quashing hopes that the market has slowed.

The BoE said it was not in the business of "clobbering the consumer" but most experts predict it will raise interest rates for the fifth time in less than a year next month.

David Page, an economist at Investec, predicted rates would peak at 5.25 per cent early next year, although he added that this was unlikely to cause problems for most households.

This view was echoed by John Healey, economic secretary to the Treasury.

He said: "We will take no risks with our hard-won economic stability, which has delivered historically low inflation and interest rates alongside uninterrupted growth and record levels of employment.

"Because inflation and interest rates are at historic lows, debt interest repayments as a percentage of household income are now half the level of the early 1990s when we faced 10 per cent inflation, 15 per cent interest rates, 1.5 million in negative equity and 250,000 homes repossessed."

He added that in 1990 an average 15 per cent of a household’s income was taken up by interest payments on debt, compared with 7.1 per cent in the first quarter of this year.

Hilary Cook, investment strategy director at Barclays Stockbrokers, said: "One of the reasons it [the 1 trillion] isn’t as scary as it seems is because the value of assets held by the consumer has gone up massively as well."

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She said during the past nine years people’s assets, which are mainly property, had risen by about 60 per cent in real terms.

She said: "We are borrowing against assets which have gone up massively, interest rates are still relatively low and we all have jobs."

But consumer groups remain concerned. Malcolm Hurlston, of the Consumer Credit Counselling Service, said: "There are now a trillion reasons why consumers need to stop and think if they can afford their debt burden, particularly if interest rates go up."

Owing nothing

SCOTT McCallum flips open his wallet to reveal a thick line-up of credit cards. The 35-year-old uses plastic every day to pay for his groceries, meals and petrol as well as for big-ticket items such as holidays and sports equipment.

"I have seven credit cards and an American Express card," he says. "I’m sure I don’t need all of them, I probably use only three or four regularly.

"I guess I spend too much time hanging around airports where you get collared by the sales teams."

He continues: "I use them for practically everything as I very rarely have much cash on me and I have never got into the practice of using debit cards. I probably pay with my credit cards 20-30 times a month and the bill can be around 1,000, especially if I’ve booked a holiday.

"I’m also overseas a fair bit with my job and credit cards are always a life-saver if you have no local currency."

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But unlike a large proportion of Scots he is careful to pay off his balance every month.

"The interest rates are so punitive. To me, it does not make sense to pay interest, it just seems like such a waste of money.

"I don’t pay by direct debit as it’s easier to forget about what you’ve spent. When the bill comes in I give it a quick check and pay by internet banking or I go into a branch.

"I use my credit cards as a tool of convenience, not for borrowing money. It saves me going to the ATM all the time and it allows me to track my spending.

"But I loathe paying interest. One month I did forget to pay and there was an interest charge of 20. That totally annoyed me."

The project accountant, who works in Edinburgh, has a mortgage on his two-bedroom flat but deliberately avoids other forms of debt.

"A mortgage makes sense and it is an investment. But I would avoid any other types of loan. If there was something I wanted and I couldn’t afford it, I would have to save up."

How many zeros is that?

TODAY, a trillion is defined as a million million, ie 1,000,000,000,000. This follows the American system, which has been adopted here.

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It used to be that a British billion was equivalent to a million million, while a US billion was merely a thousand million.

Thus, a trillion in British terms was formerly 1 followed by 18 zeros, compared with the current 12 zeros.

US usage has eroded the European system, particularly in Britain, principally as a result of US finance, which insists that $1,000,000,000 be called a billion dollars.

In 1974, the then prime minister, Harold Wilson, announced that henceforth a "billion" would mean nine zeros and not 12 in official reports and statistics.

Today, 1 trillion would buy you four million Rolls Royce Phantoms, 214 million NHS hip-replacement operations and 182 years of food for the world’s starving children.

It would take the average Briton 40 million years to earn.