UK plastic crisis as credit card debts mount

Europe will lose millions as borrowers default on credit card loans - and Britain could be worst hit.

Last Updated: 31 Aug 2010

The International Monetary Fund has come up with a fairly shocking statistic: it reckons 7% of the $2.5bn Europeans owe to their credit card companies will not be paid back – and since we Brits have been bashing the plastic harder than anyone else in Europe, we’re going to bear the brunt of these losses. Credit card defaults are already rising fast in the US, and the IMF thinks Europe won’t be far behind – particularly since a falling housing market and rising unemployment are likely to exacerbate the problem. The days of easy credit are long gone – for now…

Apparently the IMF is predicting a 14% default rate for the $1.9bn of consumer debt held in the US – that’s the best part of $300m. And as usual, when the US catches a cold, the rest of the world sneezes (perhaps not the most sensitive analogy at the moment, but you know what we mean).  Even if Europe’s default rate is lower, we’re still talking about losses of over £100m – and since the UK has a higher number of credit card borrowers than anywhere else on the Continent, there are no prizes for guessing who’ll be responsible for the largest portion of this.

According to the FT, the UK’s National Debtline is currently getting twice as many calls from nervous debtors as it did this time last year – over 40,000 in May alone. And it presumably isn’t expecting that to change any time soon. Rising unemployment will make it even harder for some borrowers to repay their loans, particularly since they can’t rely on taking a bit of equity out of their house to balance the books. So if anything, this default rate the IMF is predicting looks on the low side.

This obviously isn’t great news for the banks. For years, they’ve been doling out credit cards like confetti to anyone that wanted one; now defaults are rising, and their results are likely to show more and more loans going bad, we suspect they might be a little less liberal with their issuance for a while (although we wouldn’t be surprised if they turned out to have fairly short-term memories when things pick up).

Then again, it’s also true that £100m is fairly small potatoes in light of the catastrophic losses elsewhere in their loan books. And let's face it: who's going to have much sympathy for credit card companies anyway, let alone the banks that own them...

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