Credit cards, new technology and consumer debtJodof Consumer Studies and Home Economics (1989) 13,293-3061. Credit cards, new technology and consumer debt * JEREMY MITCHELL Independent Consumer Policy Adviser, London There has been a rapid expansion in conswner indebtedness in the U.K . The amount of consumer debt has doubled in real terms during the lmt I0 years. The majority of conswners are able to cope with their debt repayments, bur there are a sigtuficant number of credit wualtia, open burdened with multiple debts. Credit car& have played a significant bur not ovemhehing part in this hiease in &bt. There are now 62 bank credit uydr for every IW ad& in the U.K .,I I much higher incidence than in any other European country. Credit car& have been aggressively marketed and sold, and it u possible rhot thcy will now move downmorkrr, to comwners in lower income groups. Thir possibility highlightc the need for a major consumer education campaign on the cast of credit. U.K . consunurs' knowledge of and ability to compare credit interest rates poor, especially among lower income consumers who are most at risk. The explosion of consumer debt In recent years there has been a sharp rise in the indebtedness of U.K.c onsumers, as shown in Table 1.' These figures show that, in money terms, total consumer indebtedness has more than doubled in the four years to the end of 1988, with housing debt (i.e., mortgages) rising slightly faster than personal debt. Taking price increases into account, both forms of debt have more than doubled in red terms since 1980. Tab& 1. Gmsumer debt outstandiag in W.K. at end-year (knillion) Housing debt Personal debt All consumer debt - 1984 108.535 22.307 130,842 1985 127568 26.1 12 153.680 1986 154,034 30.548 184582 1987 183,544 35,566 219.110 1988 222,865 42,839 265,704 Corrapondcnce: Jeremy Mitchell. 214 Evering Road, London E5 SN, U.K. 'Based on a paper presented at thc Imtitut fiu Fidicnstlungen Conference on Unemployment and Consumer Debt, Hamburg, 23 Scptembcr 1989. 293 Credit cards pad amsumer debt What are the implications of these national figures for individual households? Table 2 shows the average indebtedness per U.K. household at the end of 1988; converted into dollars (at f 1 = $1.626) and DM (at f 1 = DM3-078)to make cross- national comparisons easier. The average consumer debt outstanding per household at the end of 1988 of 12,533 does not take account of the fact that, at any one time, only 37% of U.K. households have a mortgage and an estimated 47% have any personal debt outstanding.* Taking these proportions into account, at the end of 1988 those households with mortgages had an outstanding housing debt which averaged f28,140 ($45,75&rDM86,615). Those households with any personal debt averaged 4,300 ($6,95WDM13,235) outstanding. By historical standards, these are very considerable sums. They represent a substantial increase in the ratio of debt to income, though it is only fair to point out that the ratio of debt to assets has not changed greatly. This is largely because of the rise in the absolute and real value of house prices that has taken place in the U.K. Precise international comparisons are difficult to make, but in general terns the level of consumer indebtedness in the U.K. is lower than in the U.S. and higher than in other European countries. How does the use of credit and the level of indebtedness vary among different kinds of U.K. households? Age is a significant factor. Of those between 25 and 44 years, 89% use one or more types of credit, including mortgages. The proportion falls to 73% among people between 45 and 64 years and is as low as 28% among the elderly (over 65 years). Among young adults between 18 and 24 years, 71% are credit users. There is also some evidence that households with children are more likely to use credit than those without.Y6 Evidence about how the amount of indebtedness is related to income is less easy to interpret. It Seems that the amount of indebtedness increases with household income, but the evidence that it is proportionately greater is less clear- cut. However, households at the very bottom of the income scale (i.e., with an income less than 2,500 per annum) seem to borrow proportionately less than others, though those that do have little financial margin for debt repayment. Tab& 2. Average consumer debt outstanding per U.K. hOusCbOld 8t end-1988 Housing debt Pcmd debt All consumer debt f 10312 2,021 12.533 f 17,092 3386 20,378 DM 32,356 6221 41,577 Contributory factors What are the reasons for this explosion in indebtedness in the U.K.? There seem to be five main contributory factors at work: (i) Until recently, retail markets were relatively neglected by banks and other financial institutions. Corporate markets were considered more profitable and therefore more attractive. This was especially true of credit markets. The situation started to change rapid