The inside story

21st February 2003 at 00:00
'Hey, big spender!' Did you know that we now owe more than pound;250 billion on mortgages and credit cards? Sean Coughlan describes how it became socially respectable to live on tick

We have become a nation of debtors, borrowing money in a way that would have appalled previous generations. The financial watchdog, the Financial Services Authority, has been the latest in a long-line of worthies to throw up their hands in horror at our collective urge to spend without saving.

Like a rather forlorn man on a railway track trying to flag down an express train, the head of the Financial Services Authority has warned that we're hurtling towards a crash if we carry on gathering such a burden of debt.

The figures are so huge they're almost meaningless. Last year, mortgage lending totalled pound;219 billion, up by almost 300 per cent in five years. We have more than pound;40 billion outstanding on our credit cards, which has doubled in five years. The average debt as a proportion of household income has risen by about 50 per cent in a decade. And the financial watchdog says six million families are facing difficulties with repaying what they owe.

But how did we get into such a state with our finances? And how different are we from previous generations in our attitude towards owing money?

As long as there has been money and trade, there has been lending and borrowing. The ancient Babylonians, Assyrians and Egyptians all used credit systems. And the Greeks and Romans were not unfamiliar with paying interest.

There is an equally long history of moral disapproval and double standards towards money lending, with most major religions having at some stage sought to discourage usury. But the prospect of profit and the need to borrow have usually always found a way through.

In medieval Europe, Christians were not allowed to charge interest on loans, so Jews, often excluded from other trades and crafts, became moneylenders. And with great unfairness, these lenders could become the target of popular anger.

Even though there was a stigma attached to ordinary people getting into debt, this never stopped the rulers. In 1433, fighting a war with France left the English Exchequer with a debt of pound;30,000, which the Bank of England says is the equivalent of pound;100 billion now. And if you've ever wondered about the word "exchequer," it was a wooden board with a checker pattern, on which the national accounts were worked out.

There has also been a longstanding history of shops trying to tempt us into borrowing so we can buy something with money we don't have, but promise to re-pay later. Furniture shops in London were offering credit terms for shoppers in the 18th century.

These were the forerunners of hire purchase agreements which became popular at the end of the 19th century. They allowed people on modest incomes to pay by instalments for goods they wouldn't otherwise be able to afford. And phrases such as buying "on tick", "on the drip" or "on the never, never" became part of the language.

But there were still deep social reservations about borrowing too much and fears about the consequences. Perhaps this wasn't surprising when until 1868 you could end up in prison for failing to pay your debts, and the prospect of failed borrowers languishing for years in debtors' prison or the workhouse threw a long shadow.

For the industrial working classes and for those a few rungs up the social ladder, debt was not a comfortable prospect. Instead a culture of prudence and thrift was promoted, where money was put aside for a rainy day and people "lived within their means".

Perhaps the symbolic end of this era of financial rectitude came in 1966 with the arrival of the first credit card in Britain, issued by Barclays.

It was another post-war import from the US where, in the 1950s, credit cards were the successors to early versions of store cards. These cards had allowed customers to buy on account and settle at the end of the month.

For the first time in Britain, instant credit had arrived, where within an agreed limit, cardholders could borrow without asking. What made a credit card different from a store card was that it wasn't limited to a particular shop, as the credit arrangement was with the card company rather than the retailer. The credit card company paid for the purchase and the card holder was then expected to pay back the card company, with the penalty of paying interest if the debt was not cleared in full.

When there were tight restrictions about who could get a mortgage and when borrowing money meant putting on a suit to see the bank manager, the credit card was about giving power to the consumer, although in the 1960s and 1970s, it largely remained the preserve of the well-off, often associated with business users who would use a credit card when travelling.

The impact of this new type of borrowing was not felt immediately, says Matthew Whittaker of the Credit Card Research Group. In the 1960s and 1970s there was a steady growth in credit card use, and in the 1980s there was an expansion in the number of card providers. But the great surge in spending on the plastic was a phenomenon of the 1990s.

In the case of credit cards, this surge has been attributed to the arrival of a new breed of lenders from the US, who gave credit cards the kind of mass-market appeal they never had before.

But Matthew Whittaker also says the past decade has seen a cultural change in the attitude towards borrowing and using credit. Monthly-paid workers have grown used to never seeing the cash in their hand, they shop on credit and pay what they owe later.

This acceptance of debt as part of modern living didn't just affect credit cards. In the 1990s, personal loans became more readily available than ever before, marketed everywhere from television to leaflets at supermarket checkouts.

And with the abolition of student grants, young people became acclimatised to debt. Under the system of loans and fees proposed by the Government, it's expected that graduates will leave university with debts in the region of pound;20,000 which will be paid back once they start earning.

Throughout the 1980s and 1990s there had been a widening of home ownership and this too increased the amount of money borrowed. And in our decade, the first-time buyers of the 1990s are now part of a huge growth in re-mortgaging, as people borrow against the increased value of their homes.

Last year, re-mortgaging represented almost two-fifths of all mortgage lending, as people increased their borrowing to give themselves a cash windfall.

So what caused this great sea-change in attitudes towards debt? After many decades of a reluctance to borrow, why did we throw away our inhibitions and plunge into debt?

Among the more straightforward theories is that it's another example of taking a lead from the United States, which has always had a more relaxed attitude towards living on credit.

Research commissioned by the Department for Trade and Industry also found generational differences in attitudes towards debt, with older people much more opposed to borrowing than younger people. And as this debt-friendly, younger generation grows up, the amount of money owed on credit cards, loans and mortgages grows alongside it.

There have also been claims that the increase in debt reflects the more aggressive marketing techniques of lenders and the fact that there is generally much more access to credit than before. Banks now ring customers to ask if they want to borrow, where once it would have been the other way round.

But there are other cultural interpretations. Cary Cooper, professor of organisational psychology at UMIST (previously University of Manchester Institute of Science and Technology) and commentator on social change, states that this spend-now-and-worry-later attitude is a response to profound changes in the labour market.

According to Professor Cooper, the sense of insecurity in the workplace has also now filtered into our spending behaviour.

"Up until the end of the 1970s, people didn't want to get into debt. That was largely true of all social classes," he says.

But that world of prudent saving disappeared with the end of jobs for life, he says. "From the 1980s we moved towards a society where jobs were less secure. People are working long hours in insecure jobs, so they want to reward themselves. There is an insecurity in how we live now and part of that is to say, 'I'm in debt, so what?' " But the disadvantage of borrowing is the burden of repayment and, according to the Citizens Advice Bureau, the number of people struggling with debts has risen rapidly, with their advisers taking on a million new cases last year.

"It is difficult to resist the conclusion that the recent growth in consumer borrowing will lead to problems for a record number of people, who will face far larger debt problems than ever before," says chief executive, David Harker.

THE AGE OF PLASTIC

There are now more than 55 million credit cards in circulation in a population of 60 million in Britain. In one month over last Christmas, we spent pound;9.3 billion with credit cards. In the 1980s, financial deregulation saw an expansion in the range of credit cards on offer. Banks and building societies introduced their own cards and in an era of conspicuous consumption, cards became status symbols with the launch of "gold cards" to higher income earners. These have lost their capacity to impress and credit card companies have escalated their prestige cards through platinum to black cards. At present, you need to be earning above pound;70,000 to qualify for a black card.

Even though the growth of the credit card is associated with the 1980s, the mass ownership of cards really only happened in the 1990s. The driving force came with the arrival of credit card companies from the US. These introduced a new level of competition, aggressively marketing lower interest rates and seeking a much wider range of customers. You no longer had to be earning much to hold a credit card and you didn't have to look further than the adverts on the doormat to find where to apply.

The 1990s and the first years of this century have seen a massive increase in credit card use, with more than 1,300 different cards available. You no longer need to have a card from a traditional finance company - you can get credit cards from charities, supermarkets, trade unions or your favourite football club.

This growth in credit and debit cards has seen a drop in the use of cash and cheques and last year, for the first time ever, plastic spending accounted for a majority of high street transactions. The rise and rise of credit cards has also seen the emergence of a whole new type of crime. The illegal cloning of credit cards to create counterfeit versions has become a multi-million-pound problem.

The next big change in the credit card industry will be an attempt to block this fraud, with the introduction of microchips in cards and the use of PIN numbers in a way that's already in use in France. By the end of next year, we'll have stopped using signatures when we use credit cards.

Financial authorities and debt charities will also be watching to see whether the surge in credit card borrowing will continue. In the mid-1990s, the total number of credit cards in circulation stood at about 25 million, but by the end of the decade the number had doubled. And between us we have more than pound;40 billion outstanding on our credit card accounts.

This unprecedented level of borrowing has been attributed to a combination of low interest rates, low inflation and low unemployment, which have created a sense of affluence and boosted consumer confidence. But debt advice centres have warned that too many families have built up credit card debts they cannot afford to repay.

When we think about people with money difficulties, while we might not blame it on boozing and gambling we might put it down to too many foreign holidays and shopping sprees. But the majority of money problems have much more mundane causes, say debt advisers. The most typical is a loss of income after a sudden change of circumstance, such as losing a job.

People still have bills to pay and repayments to keep up. And needing to replace the lost income, they borrow and then borrow more to pay back interest on what they owe. Income stops but spending doesn't. Advisers such as the Citizens Advice Bureau and the Consumer Credit Counselling Service say people can quickly get into financial difficulties.

Another typical response to debt problems is to pretend they aren't happening, to the extent that people refuse to open the post in case it's bad news. But the advice charities urge people to seek free, confidential debt counselling so money problems can be resolved before they get to the stage where people are threatened with losing their homes. Advisers will help people draw up a realistic budget for repayments. They can act as intermediaries between debtors and lenders so a fair settlement can be reached. Making a voluntary repayment agreement with a creditor can be much better than being taken to court. Debt advisers will also look at how outgoings might be reduced and how potential income can be maximised.

When people are under financial pressure they can be vulnerable to offers of dubious help. Advisers warn against companies which encourage debtors to borrow their way out of problems with even bigger loans, often secured against the borrower's house. There have also been questions raised about debt management companies which can charge hefty fees for their services, while debt charities provide free advice.

And watchdogs such as the Financial Services Authority are sceptical about "credit repair" companies which promise to wipe clean a bad credit record.

"Credit repair companies claim to be able to remove information from your credit file - don't be fooled," it says.

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