Credit card threat to economy

SOARING borrowing on credit cards could threaten Britain's financial stability, the Bank of England has warned. Its latest assessment will raise serious questions over the current record debt levels. The Bank says they may be building up 'vulnerability for the long term'.

Its six-monthly Financial Stability Report coincides with the peak Christmas spending period, which poses the greatest debt risk to families. Spending on credit cards and bank borrowing normally soars in the festive season.

Households recently smashed through the £1 trillion-mark for debt for the first time, meaning that an average of £17,000 is owed by every man, woman and child on mortgages, personal loans, overdrafts and credit cards. Borrowing is growing at 15% a year. Experts say it could end with the bubble bursting, bringing financial ruin for families and the economy.

The Bank warns: 'Lenders and borrowers may underestimate these vulnerabilities because, at the moment, the near-term risks seem low'.

There are fears that the boom in house prices has inflated the confidence of borrowers. Property values have risen so fast that home owners do not worry about taking on more debt, believing that the equity in their property will cover any problems.Though the majority of borrowing is in mortgages, the Bank is said to be most concerned at credit card debt and other unsecured borrowing such as personal loans.

Families have more credit card debt than at any time in the past, which could cause a major problem if the housing market collapses. The average household borrows 140% more than its combined income. The Bank says this is above levels in the US and most large European countries. {2}The Bank says the level of defaults on debt is low but if house prices fall - as many experts say they will - there could be 'wider repayment problems'. That could slow spending and have a wider impact on the economy, including the labour market.

Bank Governor Mervyn King said last month that he expected house prices to fall 'modestly' for a period and admitted the outlook was uncertain.

There have already been warning signals over debt, with a rise in the numbers of people reporting repayment problems to consumer groups. Around six million families are said to be struggling to make credit repayments.

High Street banks could face particular problems because a much larger share of their debt portfolio is unsecured borrowing. The Bank says that although it makes up 18% cent of their lending to UK residents, it has been responsible for 93% of write-offs.

On the more positive side, the Bank says high employment makes it unlikely that there will be wide defaulting. Debt interest repayments, as a percentage of household income, are still only half the level of the early 1990s and interest rates are also at historically low levels.

The Bank kept rates unchanged at 4.75% this month and although experts predict rises next year, they are unlikely to be severe. Overall, the Bank says the economy is generally robust, a verdict which will be largely welcomed by Chancellor Gordon Brown.