Card debt ‘hides lack of wealth creation’

Consumers have been piling up credit card debt and creating the illusion that they are getting better off, with the country living beyond its means both at a personal and state level as a result.

This is the claim of Stephen Archer, business analyst and director of management and marketing firm Spring Partnerships.

He said: "£5,000 credit limits on credit cards are commonplace, but with an average income of £26,000 this is a frightening combination. Credit has been too easy [to get] and the spending from the credit has masked the reality that structurally we are not generating enough wealth as individuals, or a nation, to sustain this."

Mr Archer suggested the problem is a cultural one, with a "disposition towards debt" developing as attitudes have altered from regarding debt as a negative thing to be avoided to becoming a "badge of honour".

Moreover, people were living in denial that such a situation could ever have a "day of reckoning".

Consumers may now, of course, be much wiser as a result of facing the harsh reality since the credit crunch hit in 2007, with many needing debt help to tackle their unsustainable finances.

And with austerity measures in place to lower government debt, consumers are faced with the negative aspects of lower state spending at a time when recession has put many out of work and left others working part-time or on reduced hours.

For some people, the result of all this is that they may be suffering from a low income while their large debts pile up higher, making it unlikely they will ever be able to pay them off.

But while it may seem like there is no way out bar bankruptcy or whatever the worst is the bailiffs can do, an individual voluntary arrangement (IVA) may provide an alternative.

While it amounts to a form of insolvency, an IVA is less dramatic. It involves a negotiated settlement where creditors accept lower repayments, made over a period of five years or less, after which anything left owing is written off, provided these have been maintained.

For some, an appeal of this arrangement is the knowledge that they are at least taking responsibility for paying some of their deficit, rather than the sense of 'cutting and running' that can come with going bankrupt.

But a bigger problem with bankruptcy is that it can still carry a stigma and it is impossible to keep it secret. Apart from the fact that such a ruling will automatically be published in the London Gazette, details can be revealed in the local press. By contrast, an IVA is a confidential agreement.

Any form of insolvency will mean very restricted access to credit for a few years, although many who have got into trouble with excessive borrowing may regard this as no bad thing. However, because it is not something to enter into lightly, it is important to get good advice first and find out if it is the best solution, or whether there is a better alternative.

Insolvency Service figures have revealed more individuals in England and Wales have resorted to IVAs than bankruptcy in every quarter since the first three months of 2011. 

Posted by Paul Thacker