Why the UK debt mountain isn't getting any smaller

The UK consumer's credit card borrowing fell for the first time ever last year. Meanwhile, Barclays reckons it's over the worst of its bad debt problems. But has Britain really got to grips with its borrowing?

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The UK consumer's average credit card spending fell on an annual basis for the first time ever last year, according to Euromonitor International.

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Meanwhile, banking giant Barclays reckons it's over the worst of its bad debt problems.

So are UK consumers finally getting to grips with our borrowing?

Apparently the UK consumer is 'falling out of love' with their plastic . Last year, according to Euromonitor International, the average amount spent on credit cards fell for the first time ever. In 2005, the typical spend per person was £1,978 - but in 2006, it was £1,900.

Spending is expected to fall further next year, by another 3%. Euromonitor says: "UK consumers are now less willing to get into debt on credit cards with high APRs, turning instead to longer-term...loans which offer better value for money."

That's a nice cosy way to look at it. The consumer is wising up. Equally, most of the reports you'll read about this sort of thing will suggest that this fall in credit card lending means the UK's borrowing binge is tailing off.

This seems to be backed up by the latest results from Barclays. The City pundits are in raptures because the bank seems to have finally got a grip on its bad debt problem. Bad debts jumped 37% to £2.15bn, but chief executive John Varley said that "we believe we passed the worst in Barclaycard UK impairment in the second half of 2006. The number of customers missing a payment is falling."

So all's well that ends well. The personal debt crisis is over.

At least, thats what the reports would have you believe. Of course, this is nonsense. The amount we're spending on credit cards might be falling, but personal debt keeps ticking up.

The reasons that we're not spending so much on credit cards is not because of any miraculous rise in self-control - it's because the banks have stopped letting any Tom, Dick or Harry get hold of one.

Sure, as Barclays said, "the number of customers missing a payment is falling." What isn't highlighted quite as strongly is the fact that the number of customers is also falling - down 1.4 million to 9.8 million.

If you can't borrow on a credit card, you have to go somewhere else - get a personal loan perhaps, or worse still, aconsolidation loan, secured against your house. And all those people who are being denied credit cards are still being allowed access to these.

The trouble is, once upon a time, credit card debt was seen as short-term - it's something you would use for the occasional purchase that maybe cost a bit more than normal, like a new television, or a holiday. Short-term consumption that you'd be able to pay off within a short period of time.

A personal loan would have been for something more significant, like a car or a loft extension, that would take longer to pay off, but is arguably less frivolous than a TV or a holiday. And securing money against your home would have been strictly for the desperate, or entrepreneurs without access to a less precarious source of funding.

But nowadays, many people have effectively staked their house in order to fund essentially frivolous consumption - rolling up all the credit card debt that never got paid off, along with the personal loan to pay for the two-week 'holiday of a lifetime', and sticking the lot on the mortgage.

So far, the banks over here have just felt the pain from the sub-prime credit card market, and have finally acted accordingly - blocking access to those who won't be able to repay their debts. Meanwhile, the strong housing market has sustained the borrowing binge.

But as we're seeing in the US, sub-prime lending on houses is just as likely to go wrong as giving credit cards to sub-prime consumers. And if the UK housing market goes the way of the US, we have a feeling that the banks may find their current bad debt problems were just the tip of the iceberg.

Turning to the stock markets

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In London, the FTSE 100 managed to close above 6,400 again yesterday despite an afternoon tumble. The blue-chip index fell 32 points to end the day at 6,412, tracking a poor start on Wall Street. Packaging firm Rexam and brewer Scottish and Newcastle were the day's biggest fallers on concerns over future profits. For a full market report, see: London market close.

Elsewhere in Europe, the German DAX-30 closed 4 points lower, at 6,982, whilst the Paris CAC-40 ended the day 28 points weaker, at 5,711.

Across the Atlantic, the Dow Jones set a new record close despite falling earlier in the day. The index gained 19 points to end the day at 12,786 with Wal-Mart one of the day's strongest performers on better-than-expected results. The Nasdaq and S&P 500 both set new six-year highs, ending the day 16 points higher at 2,531 and 4 points higher at 1,459 respectively.

Reaction to the Bank of Japan's decision to hike interest rates hit investor sentiment, sending the Nikkei index 25 points lower to a close of 17,913.

Crude oil was lower again this morning, having fallen 45c to $58.40, whilst Brent spot was 51c lower, at $56.16.

Spot gold fell as low as $655.40 in New York yesterday, but had climbed back to $659.40 this morning. Silver was last trading at $13.78/oz.

And in London this morning, it was revealed that estate agent Countrywide had received a $1bn offer from US private equity group Apollo. Countrywide shares had risen by as much as 7.5% in early trading.

And our two recommended articles for today...

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John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.