Economy 'at risk from card debt'

RECORD levels of credit card debt are threatening Britain's financial stability, the Bank of England warns today.

While the economy is still thriving, families are getting deeper into trouble.

And some banks are continuing to lend them money at steep rates of interest, says the Bank's Financial Stability Report.

These lenders are putting themselves at risk because borrowers are now more willing to make themselves bankrupt. The result could be a disastrous blow to Britain's thriving financial sector, the report warns.

The Bank says that so far this year the growth in credit card borrowing has stayed strong and the amount needed by households to pay off debts has risen.

While most families' monthly debt repayments cover mortgages, more is going on unsecured lending including credit cards, overdrafts and personal loans. Today's report follows warnings from a series of banks - including the Royal Bank of Scotland-NatWest group, Barclays and HSBC - that card arrears and bad debts are climbing.

The Bank goes further, saying that lenders' bad debts 'increased quite sharply in the second half of last year, wholly because of losses on unsecured lending - on credit cards and via other channels'.

High Street banks tend to be hardest hit because a much larger share of their debt portfolio is unsecured borrowing. The report says the lenders could be partly to blame for the problem.

'The question arises as to whether markets are underpricing risk and lenders underestimating the possibility of defaults,' it says. 'If that were so, it would encourage over-borrowing, raising the vulnerability of borrowers and hence lenders to adverse shocks.'

Credit card companies and banks must take responsibility for a good deal of the problem, the report adds. Many people are being lent money or given cards despite having significant debts on other cards.

Often, when lending money, the creditors 'do not have a full picture of their financial burden'. Despite this, staff are driven to selling these expensive products, since they often earn bonuses based on the value and quantity of cards, loans and associated insurance policies they sell.

Credit card rates are far higher than most other forms of borrowing. The report says the average card charges 11% above the base rate, or 15.75% at today's levels. It urges banks to improve the checks on potential credit card customers, particularly the young who, it says, are less committed to repaying debt.

The near-future does not look bright, says the report. 'Debt may continue to increase more rapidly than income over the next few years.'

British households are now more than £1 trillion in debt and the figure is rapidly rising with the average family owing about 150% more than its combined income.

Some are already doomed to financial disaster, warns the report. 'The general rise in unsecured debt may mask a sharper increase among a minority of households,' it says.

'Some have borrowed so much that they might struggle to meet future repayments.' While many households claim not to suffer any debt difficulties, this will change if house price growth slows.

The Bank is now considering cutting interest rates to prevent a widespread economic slump.