Spendthrifts who may face ruin

FEARS are growing that millions of people could be heading for financial disaster. British households went on a record-breaking spending spree last year - and are now more than £731bn in debt, the Bank of England has revealed.

A recent survey shows the average household owes more than £28,000 in mortgage borrowing, credit cards, overdrafts and personal loans.

Borrowing soared in December, fuelled by low interest rates, as consumers continued to shrug off fears of an economic slowdown. Debts, including home loans, rose by £7.2bn - the biggest monthly increase since records began.

The Bank said such rises, not seen since the economic boom of the 1980s, will raise fears that consumers are over-extending themselves in buying expensive houses and taking out large personal loans.

But millions could suffer ruin if the economy suffers a sharp downturn or interest rates begin to rise. Economists say the debt is affordable because interest rates have fallen to their lowest levels for 40 years. But they believe that mounting job losses - though low at present - could hit UK industry as part of a global economic slump.

The watchdog Financial Services Authority last month warned consumers against 'reckless spending'. Its chief Sir Howard Davies said the young 'live for today' professionals were at greatest risk, particularly those taking out massive loans to buy homes.

Although mortgage borrowing rose £5.1bn last month, some banks have restricted lending in areas that have seen huge rises in house prices amid fears of a collapse in the market.

Homebuyers also have more non-mortgage debt than in the last housing boom. During December, consumers spent £9.12bn on credit cards alone, the Bank said. Other borrowing, such as personal loans, rose £1.61bn as families tried to consolidate their debts. Consumer credit jumped by £2.2bn.

The National Association of Citizens Advice Bureaux said: 'We are seeing a million new cases of problem debt a year, and that number is rising. A credit boom on this scale is unsustainable and will inevitably turn into problem debt for many families. We would like people to be better informed over the use of credit. Sadly, we're not at that stage yet.'

The figures will fuel concerns that rates will rise in the coming months to slow the consumer boom. Sir Eddie George, the Bank's head, recently warned that interest rates may have to go up to moderate spending. But the move would horrify manufacturing, which remains deep in recession. Bosses want further interest rate cuts to boost the sector.