Warning over rise of personal debt

THE mountain of debt caused by easy credit is rising at an alarming rate, a consumer watchdog has warned.

The situation is likely to get worse because of the low inflation, low interest rate environment.

According to Citizens Advice, its offices have reported a 47 per cent increase in the number of new consumer credit debt problems over the last five years. The group warns that the UK is on the verge of a significant increase in personal debt problems if economic conditions decline. Current initiatives to prevent debt and to help people with serious problems do not go far enough or fast enough, it said.

Consumer credit debt covers problems with loans and overdrafts, as well as credit cards, store cards, mail order and hire purchase repayments. It accounted for 64 per cent of all debt.

Research carried out in May 2001, when the study began, found that people who came to Citizens Advice Bureaux for help had an average debt of 10,700 but a monthly income of about 800, under half the national average. In Scotland, the average debt of people needing help was 8,140, while the average income was 730 a month. During May 2001 alone, 900 people who asked for help owed an average of more than 14 times their monthly income.

Now, consumer credit debts of up to 60,000 have been reported, with people owing between 20,000 and 30,000 not uncommon in Scotland.

Susan McPhee, the head of social policy and public affairs at Citizens Advice Scotland, said that over the past five years, the number of debt inquiries its bureaux handled had escalated. "Bureaux advisers in Scotland now deal with around 39,000 new consumer debt inquiries alone," she said. "Across the UK, the figure comes to over one million."

The survey found that debt clients are most often women, lone parents with dependent children, social housing tenants and people on low wages or benefits. "Fifteen per cent of female clients had catalogue debts," said Ms McPhee. "Women were also more likely to owe money to local money lenders or home-collected credit providers."

The impact of debt can be severe, and includes physical and mental ill-health, homelessness and relationship or family breakdown. A quarter of those surveyed were receiving treatment for stress, depression or anxiety from their GP. Just under half of these felt their symptoms had been caused by their debt problems.

One of the causes of the increase in debt problems has been the recent economic boom. With inflation at 3 per cent and interest rates at a near 50-year low, people have been economically confident and more willing to go into debt.

Citizens Advice Scotland also blamed the commercial credit sector for some of the problems. It says people have been bombarded over the past ten years with offers of credit. By fine-tuning their marketing techniques, they are getting to people who have trouble obtaining credit.

Alarmingly, the survey showed that three-quarters of Scots were trying to cope with their debt by taking out additional borrowing. This compared to half nationwide.

Many looked to consolidation loans to try to help them out of their problems, with all debts rolled together under one loan payment. But, the group says, these loans are often at very high interest rates and take years to pay off.

Citizens Advice Bureaux clients often fell into debt because of a sudden change in personal circumstances, such as loss of a job, ill health or relationship breakdown. More Scots - 25 per cent - blamed job loss for their debt problems than elsewhere in the UK (21.2 per cent), while 30.2 per cent of Scots questioned blamed low incomes generally, compared to 18.9 per cent elsewhere in the UK.

The report concludes that a range of action is needed to prevent people from getting into unmanageable debt and to help those in debt to get out. These include a crackdown on irresponsible lending and borrowing, better access to affordable credit to those on low incomes and an increased take-up of benefits and tax credits.

Meanwhile, a new study into pocket money reveals that attitudes to easy cash can be nurtured from an early age.

Children have pestered their parents into an increase in pocket money of more than three times the rate of inflation in the past seven years.

New research shows that five- to ten-year-olds received an average 3.82 a week in pocket money, earnings and handouts in 2001. The figures revealed that cash handouts from parents had risen 66 per cent since 1994, while inflation over the same time was 21 per cent. In 1994, the average was 2.30.

The report, by market analysts Key Note, claims younger children are increasingly aware of the value of money and pester their parents for more.

Children increasingly spend separate time with divorced parents, who compete to lavish money and gifts on their offspring, the researchers say.

The trend towards older parents who often have higher disposable incomes, and smaller families, as well as a higher proportion of working mothers, is resulting in a generation of children who are more indulged than ever before.

3,700 of credit in two hours

FIRST stop: John Lewis. Never knowingly undersold.

I am shown up to the fifth floor where a customer service agent talks me through the detailed application form. He asks a few questions about my employment history, but doesn’t delve deeper than to check my current and previous job. He suggests I apply for a credit limit of 1,000 and says this is the average taken by most customers. He also informs me that for the first six months, customers are offered an introductory annual interest rate of 6.5 per cent, rising thereafter to 13 per cent. With a brief look over the form, he sends me on my way, and calls to confirm my acceptance within an hour.

So, with 1,000 of credit already burning a hole in my pocket, I set off to River Island. The sales assistant swiftly fills in a simple form on my behalf. She requires few details other than a Switch card and proof of address, and confirms my 400 instant credit (from a possible 500) after phoning through the application.

Next on my list is the illustrious Harvey Nichols, where I expect some form of resistance. I could not be more wrong. Personally escorted to the accounts department, I fill in the form, the only one to ask for salary information. Ten minutes later, I have a temporary card with a credit limit of 1,500. Dragging myself away from the womenswear floor, I head to Jenners. Not quite as generous, they offer me instant credit up to 500, but say if I wait a day or two, they could raise that to 1,000.

From there, it is on to Dixons, where I am met by a bargaining force unlike any of the other shops. The sales assistant informs me I can receive credit on any purchase I make there and then in the store, as long as the items total more than 150. Unfortunately, I do not have 150 at my disposal, but am told the upper limit stands at 15,000, subject to credit rating.

My final destination on this store-card spree is Debenhams in Princes Street. Here, again, the simple form is filled out on my behalf, with no questions about employment or salary - a Switch card and unproven address is sufficient. Having phoned in my details, the assistant offers me 250 with an interest rate of 29.9 per cent APR, but she does give me a goody bag containing perfume and cosmetic samples.

With aching feet and a bag packed with credit agreements, I return home to tot up my spending potential. Dismissing the funds available from Dixons - which would have cost me 150 - the grand total comes to 3,700. Not bad for two hours’ work.

Anna Smyth