How to make the never-never pay off

Family debt and high borrowing are here to stay, but we must find new ways to cushion the personal risks, says Yvette Cooper

As January looms, that big post-Christmas question is about to be answered. Just how much did you manage to ratchet up on your credit cards this Christmas? There was the jumper for Dad on the Marks & Spencer account, the toys for the kids on Visa, and who knows what else still to be paid for in the new year.

This week saw the publication of another survey about consumer debt - this time by the consumer credit supplier Beneficial Bank which is launching a new advisory service to help us deal with our burgeoning debts. Apparently, one in four of us will be further in debt after the Christmas spending binge. "This is just the tip of the iceberg," says Bernie Woollard, marketing controller at Beneficial Bank. "Many more will go into debt `accidentally' and could get a financial headache in the new year."

We are not just borrowing for Christmas. Britons are also in debt to banks, building societies, retailers, credit card companies, privatised utilities and loan sharks to the tune of pounds 500bn. Borrowing has soared over the past 10 years. As the graph shows, the total amount of debt held by British families is actually higher than the amount we have to spend each year.

The question is whether we can sustain this level of borrowing in future. In the Eighties, heavy borrowing appeared to be an extremely astute thing to do. Property prices rose consistently faster than inflation, turning houses into a sensible investment as well as a place to live. Over 10 million households in Britain currently have mortgages compared to only 6 million 15 years ago. And the size of mortgages has risen too. In 1980, first-time buyers on average took out mortgages worth 167 per cent of their annual income. In 1991, their mortgages were on average worth 221 per cent of their annual income.

Mortgages account for more than three-quarters of personal borrowing. But consumer credit - which includes anything from credit cards to hire- purchase agreements, bank overdrafts to M&S cards - has also expanded over the past 15 years. In 1979, approximately half of all households had credit commitments other than mortgages. By the beginning of the Nineties, that figure had grown to almost two-thirds.

But the "prudent investments" and "sensible borrowing" of the Eighties turned for many people into problem debts in the Nineties. Falling house prices have meant property is no longer such a good investment, and around a million people are stuck with negative equity. Sudden redundancies or cuts in salaries have left many people finding it hard to keep up with repayments on their mortgages and other debts. At the height of the recession, 1,500 properties were repossessed by mortgage lenders every week.

Even today, after several years of economic growth, the overall level of debt held by British families has hardly fallen. Despite evidence that many people made valiant efforts to pay off some of their debts in the past few years, there are more mortgage holders than ever, consumer credit has been rising all year, and there are still a lot of people with problem debts.

By June 1995, almost 200,000 households were more than six months in arrears with their mortgage repayments. And the Citizens Advice Bureaux saw around 750,000 people with serious financial worries last year. A spokesperson for the NACAB said that "few of them are reckless, feckless debtors". Many are living on a meagre income and simply cannot keep up with the bills for rent, heating or the Council Tax. Poverty, rather than over-borrowing in the Eighties, is at the heart of their problems. But for others, sudden unforeseen changes in their financial circumstances - perhaps redundancy, illness or divorce - has left them unable to keep up with their previous debts.

Borrowing patterns may change gradually in future - at least where house buying is concerned. A recent report by Elaine Kempson and Janet Ford at the Policy Studies Institute shows that young people in particular are more reluctant to take out mortgages: "More people perceive there to be a risk attached to borrowing large sums of money, especially as a mortgage." The number of first-time buyers more than halved between 1988 and 1992, although it has started to rise slightly since then. The chances are it will be a long time before so many are prepared to stake so much on housing again.

Consumer credit on the other hand has bounced back with far more enthusiasm. Despite the debts that remain, people seem ready to start borrowing again. Lloyds Bank points out that while in 1994 many of their customers took out loans simply to consolidate their debts, by 1995 they were borrowing for a purpose - perhaps to buy a new car. A spokesman said: "In 1995 there has been more of a feel-good factor. People are definitely borrowing more."

It looks as though there is little chance of a return to the low-debt early Eighties. Even if people could pay back their debts in a hurry, the chances are that many of us would not want to. As Goldman Sachs economists Gavyn Davies and David Walton pointed out in a 1992 report, high personal borrowing across the economy as a whole could be completely rational. Although families increased the amount they borrowed in the Eighties, the value of their assets grew too. So while we may not be earning enough to pay off our bills in a hurry, we own houses or other assets that are worth far more than our debts. In fact, total personal borrowing is only 17 per cent of personal assets. By increasing their borrowing during the Eighties, families were simply doing what businesses have always done; increasing their borrowing in line with their assets in part to invest in the future.

The problem is that while heavy borrowing might make sense across the economy as a whole, for individual families it can be a very risky venture indeed. It can be impossible to liquidise your assets fast enough to pay off your debts - especially if the housing market isn't moving. And the house may no longer be worth enough to cover the borrowing. Interest rates could go up and send the cost of repayments through the roof. And for those facing job insecurity, there is no guarantee they will earn enough to keep up the repayments from month to month.

So how can we reconcile the need for high credit with the growing risk of default? Firstly, people need to be aware of the real risks of the borrowing they take on. Government incentives to enter the housing market such as "right-to-buy" or mortgage interest relief encouraged many people to take on risks they were not able to bear. Perhaps instead government should encourage greater prudence by insisting that people have to save a certain amount before taking out a mortgage.

Another option might be to look at compulsory insurance against unemployment or default on mortgage payments. Currently, around 1.5 million of the 10.5 million people with mortgages have private insurance. As the welfare state increasingly withdraws from insuring people against bad times, more and more people will want to take out insurance themselves.

And for those who find themselves suddenly out of their financial depth we need constructive ways of dealing with their debts. Financial institutions have already started to develop a more constructive and sympathetic approach towards their debtors than the scare tactics and compounded charges of yesteryear. The Consumer Credit Counselling Service was set up in 1992, funded by creditors, to provide debt advice and debt management plans. Richard Sheras, managing director of the CCCS says, "I think that credit companies, banks and building societies are realising that it's probably in everyone's interests to try and help people to sort out their debts, although it's not necessarily true of all creditors."

High borrowing is here to stay. And there are new calls on personal credit too; investing in education. Most students already leave university with some kind of debt, as higher education expands they may need to pay towards their fees as well. In a world where most people need to borrow at some point in their lives we need to find new ways to help people avoid unacceptable risks, and the misery of personal bankruptcy. Or credit counsellors and debt managers look set for a busy future.