Consumers teeter on the edge of borrowing precipice

As banks warn that defaults are rising, the advice agencies are gearing up for action. David Prosser reports

HBOS this week became the third bank in 10 days to warn that the number of consumers defaulting on debt repayments has risen sharply this year. The Halifax Bank of Scotland group says that its bad-debt provisions will increase markedly this year. It is now tightening its lending requirements to try to get on top of the problem.

HBOS's warning follows similar alerts from both Barclays and HSBC last week, amid increasing concern that Britons may finally be running into trouble in repaying the £1trn of consumer debt now outstanding.

The Bank of England's latest consumer-credit figures, also published this week, show that borrowers are continuing to spend more on credit cards and personal loans. And, while last month's rise was the smallest for four years, some debt experts believe that many borrowers may have passed the point where showing some restraint will get them out of trouble.

The three banks' warnings are the latest signs this year that a debt crisis is imminent. In April, for example, the Government announced that 37,900 people went bankrupt over the year to the end of March, a 30 per cent increase on the previous year. And figures from Credit Suisse First Boston suggest that borrowers will default on £4.5bn of bank loans and credit-card debt this year.

The defaults come as people struggle with higher mortgage bills than a year ago - there were five increases in the Bank of England base rate over the 18 months to last August. A reduction in the number of interest-free deals on offer from credit-card lenders has also prevented people moving debt around so easily, which may previously have masked the extent of their borrowing.

For now, lenders are not panicking. Barclaycard's Ian Barber says: "You will always see ups and downs in bad debt figures during the economic cycle, but we believe that the current levels are manageable in the absence of significant interest-rate rises or a sharp increase in unemployment."

However, the increases in bad debt at banks such as Barclays and HSBC are larger than those analysts would expect to see when the economy is not in recession. HSBC economist John Butler warns: "Consumers are now very sensitive to the slightest shock. What is worrying is that this has happened when unemployment is still very low."

One problem may be that many people are actually worse off than economic indicators suggest - high-profile job losses at companies such as Rover, for example, have yet to feed through into the official figures.

But debt advisers are concerned about the type of people in difficulty. John Fairhurst of the charity Payplan says: "Debt problems are no longer just the result of a change in circumstances, such as a relationship break-up or losing a job. We're seeing more people who've just been spending a little too much each month over an extended period and who find that this is now catching up with them."

Malcolm Hurlston of the Consumer Credit Counselling Service adds: "Broadly speaking, people adapt to changes in their circumstances more quickly than the experts predict and, in fact, real incomes have continued to rise this year. Even so, it is clear that consumer spending is slowing and that many of our clients are finding it even harder to make repayments."

The CCCS took 180,000 calls from worried borrowers last year, and is currently hiring enough new staff to be able to cope with 300,000 calls in 2006. Payplan says it is also hiring, with the number of calls it receives having increased rapidly over the past six months.

What frustrates debt advisers is that many borrowers only realise they are in trouble when a crisis point arrives. By taking action earlier, it is possible to avoid disaster. Anyone struggling to stay on top of debt should talk to one of several free advice services. They may be able to help you resolve the problem by sorting out your finances.

There may be obvious ways to reduce the cost of debt, for example, or you may be missing out on state benefits. These agencies can also speak to creditors on your behalf, in order to renegotiate what you pay each month.

CCCS, 0800 138 1111; National Debtline, 0808 808 4000; Payplan, 0800 085 4298