Families on the brink of 'insolvency crisis' after decade-long credit card binge

Families on the brink of 'insolvency crisis' after decade-long credit card binge. Debt stress: Thousands of families are spiralling into insolvency. (Posed by models)

Families are drowning in debt after a decade-long binge on credit cards. The Bank of England today warns lenders are writing off record quantities of credit card borrowings as thousands of individuals spiral into insolvency.

Lenders are responding by pushing up interest rates even higher, putting more families in financial trouble, the Bank said in its Financial Stability Report.

However, families are saving more money than they are borrowing for the first time in more than 20 years, according to a Bank of England report.

Last year £24billion went into deposit accounts while £20billion came out in new loans.

It is the first time since 1988, when records began, that savings have overtaken new borrowing.

Economists said households had become increasingly concerned about paying their debts following the recent recession.

The findings are backed up by separate research which today warns of a looming ‘insolvency crisis’ in the UK.

A record 146,948 Britons will be made insolvent in England and Wales this year, up 10 per cent on 2009, according to a ComRes survey for insolvency practitioners group R3.

Steven Law, president of R3, said: ‘We stand on the brink of a personal insolvency crisis that will take years to work through the system.

‘We know there are nearly a million people out there who are struggling with their debt.

‘While it may be the case that these problems are resolved without help, there is a risk that they might snowball out of control.’

Britain is now by some measures the most indebted country in the world, the coalition’s Budget said this week.

Lax lending standards and a huge appetite for consumption in the decade leading up to the credit crunch has led tens of thousands of families to rack up unprecedented quantities of credit card debt, overdrafts and unsecured loans.

But it is now payback time as loans are due in the wake of the deepest post-war recession.

Chancellor George Osborne’s draconian Budget has only heightened fears about households’ ability to weather a storm of tax hikes and welfare benefit cuts.

The average family on £45,000 a year will suffer a hit of more than £700 to their take-home pay as a result of the Government’s decisions, research for the Daily Mail shows.

The Bank of England report showed in the year ended March 2010 banks wrote off more than 10 per cent of their credit card loan balances.

This was a record rate, up from 7 per cent in 2007.

This amounted to £1.25billion of defaulting debt in the first quarter of 2010 alone.

Over the past 12 months banks have written off more than £4.5billion of credit card loans.

The Bank warned the burden of interest payments could become even more crippling if official interest rates were to rise from their current ultra-low levels.

The official Bank rate has been slashed from 5.5 per cent at the beginning of 2008 to just 0.5 per cent today.

Yet in the same period the average credit card loan rate has risen.

At the start of 2008 it was 14.8 per cent, according to Bank of England data, but it now stands at 16.5 per cent.

A further setback to the economic recovery would also make matters even worse, and ‘aggravate household distress,’ the Bank reported.

It said: ‘In the absence of significant de-leveraging (debt repayment) by the household sector, UK banks are exposed to the risk of higher defaults were interest rates to rise from their current historically low levels or recovery to falter.’

The report added: ‘Unsecured lending to UK households accounts for a relatively small proportion of UK banks’ loans to domestic customers’.

‘But since the beginning of 2007 these exposures have accounted for around two-thirds (£23billion) of domestic write-offs by UK banks.’

In 2004 borrowing hit an all-time high of £125billion thanks to cheap credit being readily available.

Families remortgaged their homes in order to release equity for holidays and other luxuries sending debt levels soaring.

At its peak, in 2007, net mortgage lending hit £108billion.

Last year, by contrast, households borrowed just £20billion - the lowest level since 1993.

David Hollingworth, from mortgage brokers London & Country, said there had been a complete turnaround in the approach of borrowers.

'Rather than using mortgages as a cheap way of borrowing – effectively using their home as a piggy bank to fund their luxury purchases – they are now looking to pay down debt more quickly,' he said.

'They are tightening their belts amid concerns about higher interest rates in the future and questions over the employment market.' ( dailymail.co.uk )