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Record numbers turn to credit cards

More people are borrowing money on their credit cards than ever before according to new reports by the Bank of England.

More from Trends and Analysis
3 November 2008

Record numbers turn to credit cards

Record numbers turn to credit cards

The credit waterfall effect is when people who are faced with rising mortgage costs and lower incomes resort to short-term credit to maintain their standard of living.

Outstanding debts on cards have increased by £300 million as we all try to cope during the current financial crisis and the total consumer credit now tops £237.6 billion.

Struggling to make ends meet

These statistics represent the highest amount of consumer credit card spending since the records first were first kept in 1993.

It is a worrying increase on last September’s somewhat smaller figure of £1.749 billion.

Experts believe the reason for the increase in credit card reliance is due to consumers struggling to meet mortgage repayments and household bills.

PricewaterhouseCoopers spokesman Richard Thompson commented on the steep increase: “It is clearly a concern if consumers are living beyond their means. There are segments of consumers doing this.

"We call it the credit waterfall effect, which is when people who are faced with rising mortgage costs and lower incomes resort to short-term credit to maintain their standard of living."

The waterfall effect

The so-called waterfall effect could be digging us further and further into debt and it is debt alongside irresponsible lending which caused the credit crunch in the first place.

Mortgage liquidity is tight and there is a distinct lack of affordable mortgages on the market which has resulted in a sharp decrease in the number of houses being sold, the knock on effect being that house prices have fallen and many have found themselves in negative equity while also struggling to make repayments.

Taking out more money on their credit cards is the only way which many people can keep up with repayments and afford life’s extra little expenses. As we draw closer to Christmas, credit card spending is expected to increase even further.

Mortgage mayhem

Due to the increased number of people turning to credit cards to be able to make repayments on their mortgages, the Bank of England has paid attention to the struggling mortgage markets this week and revealed that the amount of money being repaid on UK mortgages was far greater than the amount of money lent by the banks.

Experts believe that this will result in a lack of competitively priced mortgages in the near future but it might work out better for the economy and worse for borrowers, who will continue to struggle, in the longer term.

Speaking about these mortgage issues, Howard Archer, a respected economist from Global Insight, commented: "Despite the very limited improvement from August, the Bank of England mortgage data for September still showed that housing market activity continued to be decimated by the highly damaging combination of stretched buyer affordability and tight lending practices."

Archer added: "There is also likely to be higher distressed borrowing over the coming months, as people struggle in the face of high food prices and utility bills, and rising unemployment."

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