Maxed-out Britain

As downturn and austerity bite, personal debt is soaring, with record numbers using credit cards and loan sharks to make ends meet. Simon Read on the UK's other national debt

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The Independent Online

Britain is becoming a nation of debtors, with increasing numbers of people being forced to take out loans or turn to credit cards to pay for essentials, despite the worsening economic forecast.

The amount of cash borrowed through cards or loans climbed £629m in September, about a third more than the previous month's increase of £478m, the latest borrowing figures from the Bank of England suggest. In July the figure stood at just £369m.

Secured lending, mainly in the form of mortgages, rose about £300m over the month while the total amount of individual debt across the country rose to almost £1.5 trillion. But the increase in the amount borrowed on cards and loans is more than double the extra mortgage lending, prompting warnings that a growing number of people are relying on plastic to pay their bills.

Howard Archer, the chief economist at Global Insight, said: "The rise in unsecured consumer credit to a seven-month high in September suggests increased 'stressed borrowing' is occurring. More people are having to borrow to help finance their spending as a consequence of the extended squeeze on their purchasing power coming from elevated inflation, low wage growth and tighter fiscal policy. In addition, job losses are rising."

The amount owed on credit cards climbed £200m in September to £56.9bn, while other loans and advances rose £500m to £151.8bn.

Research by the homelessness charity Shelter and Co-operative Insurance showed that nearly a third of struggling families are being forced to spend more money each month than they have coming in, with the average adult facing a monthly shortfall of £165.

With the cost of credit higher for at-risk families because lenders consider them more risky borrowers, the fall into a disastrous debt spiral could be getting closer for millions. Those forced to turn to payday loans – or even illegal doorstep lenders – can end up having interest added onto interest, further increasing their financial woes. In extreme cases, their monthly income can end up lower than the repayments they are expected to make.

Further figures released yesterday by the Office of National Statistics revealed that struggling families are also hardest hit by rises in VAT. The data showed that the poorest one fifth of households pay more in VAT as a percentage of their disposable income than the richest one fifth.

David Breger, of accountant HW Fisher, said: "This research reinforces what is widely perceived to be the fundamental inequality at the heart of VAT: the poor pay more of it relative to their incomes than the wealthy. In a strong economy VAT is arguably less of an issue, but at the current time – in a desperately weak economy – its effect on households' incomes is being significantly magnified."

The figures come as debt charities warn that the number of people in financial difficulties is set to soar. Financial Inclusion Centre research for the Consumer Credit Counselling Service calculated that 3.2 million people were already in financial difficulty – either three months behind with a debt repayment or subject to some form of debt action such as insolvency – and a further 3 million were getting dangerously close.

It was these families which were likely to be those turning to creditto pay their essential bills, said Andrew Hagger, a money analyst at

"Pressure on family finances has been relentless over the last couple of years with many people enduring a pay freeze while at the same time having to cope with higher food, fuel and energy bills," he said.

"The net effect will result in some people being left with no choice but to make smaller repayments on their credit card debts, while at the other extreme some will be borrowing more just to keep their heads above water."

Payday lenders claim that the growth in the number of people turning to them is because of a preference for short-term credit, rather than taking on long-term debt.

John Lamidey of the Consumer Finance Association – which represents some payday lenders – said: "Consumer debt is caused when income streams are disrupted by redundancy, long-term illness or family breakdown. Some of these conditions are clearly on the increase, which is why some people are encountering significant debt problems, but not at all the majority.

"For those with structural debt there is today offered the best help there has ever been – free debt advice services from the Consumer Credit Counselling Service, National Debtline and others who set up debt management plans, plus individual voluntary arrangements and bankruptcy which can be discharged within year in many cases.

"On a macro scale, growth and jobs will do more for reducing personal debt than anything else as household income streams recover," he said.

Debt by numbers

£1bn: The rise in total lending to individuals during September

13.9: Average percentage rate charged by credit cards in September 2002

18.4: Average percentage rate charged by credit cards in September 2011

3.3%: The increase in the amount borrowed on credit cards in the last 12 months