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The spectre of bad debt

Unsurprisingly, much discussion has been had during Labour conference on the budget deficit and how the country can promote growth and create jobs while simultaneously trying to level national debt in a realistic period of time.

Of comparable importance to the level of national debt are levels of personal debt, which have seen a sharp rise in recent times. According to statistics by Credit Action personal debt in the UK (2010) was £1.5 trillion – a figure serviceable in better times, but increasingly a struggle since the recession. In the decade to 2008, average household debt in the UK increased substantially– from 93 to 161 per cent of disposable income – largely accounted for by mortgages – and is set to rise to an average of £81,000 per household by 2015.

The think tank Compass were so bold as to say over-indebtedness was linked to low wages rather than ‘consumerism’. A fifth of the 14 million lowest earners say debt is a heavy burden, more than a third have no savings at all, and one fifth have less than 1,500 in savings. Further still, social housing tenants represent 6 in 10 of the financially excluded, of whom one in 6 have no bank account (which the government should make a universal right).

In times of severe economic difficulty, ways and means of levelling one’s personal debt can get extremely difficult. Such circumstances often follow a spike in high cost credit use. Peter Crook, the chief executive of Provident Financial – a short-term, unsecured loan agent – said in 2010 that “We may well see a growth in our target audience”. When we find out who their target audience is, we can really see what drives this market. The Office of Fair Trading’s High-Cost Credit Review (Annex C, p. 36), found that 10.4% of payday customers have incomes of less than £11,100 per annum, and that 49.1% of all customers have incomes of less than £19,200 per year.

So clearly there is a problem, but what is the solution? Stella Creasy, the Labour Co-operative MP for Walthamstow, has been campaigning tirelessly for months to introduce a credit regulation bill to implement a cap on the total cost of credit – which means not capping the annual rates of interest on a loan, leaving it open for lenders to slap on high administrative fees to redeem their loss, but a cap on how much an individual will pay overall for a loan. Such a move has already been given the cold shoulder by the Tories who are instinctively against the regulation of the banking system – instead calling on more competition in the market – and by the OFT who have claimed a total cap is not necessary.

But the UK is one of only few countries in the world without such a cap. Lenders make money, not from how many times they sell credit to different customers, but on individual customers rolling over on their debts, or even taking out loans to service existing loans. As for initial measures, placing a cap on how many times a person can rollover seems a good short term move, but obliging lenders to fund financial counselling sessions would be an even more radical progression.

Further, linking existing credit unions to a modernised post office could both make the latter more relevant in an email age, and ensure more people are creditworthy and not falling into unserviceable debt.

A savings culture in this country once again needs a boost, and with the Tories scrapping the child trust fund and the savings gateway, it’s clear what side they are on. Debt, as many people – whether rightly or wrongly – will tell you is a necessary evil, and will take years of intervening to overcome; but making credit lending less dubious, and ensuring people don’t fall into severe debt cycles, especially in times of austerity, is the sine qua non for a government and a society committed to welfare.

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