Saturday, 26 July 2008

The UK credit culutre disaster


How can we end the culture created of always living on credit in the UK?

The numbers to the left are form the credit site, credit action. A truly excellent place to go if you do need advice or warning on debt. Mutely too has asked me to write on this subject many times

I have watched the Government squirm during the credit crunch and try to blame the banks for the situation that we are in.

And it is true, banks make far more money form you and I than they ever used to.

However, there is a cultural and regulatory reason behind this that is eating away at our long-term prosperity.

Ever since the 1970's and the first credit cards, Britain has become a nation of personal debtors. Instead of savings, we buy now and pay tomorrow. This is no bad thing when you are in control and helps to get you what you need.

There is nothing inherently wrong with borrowing money. What has changed is the culture. Instead of just mortgages, everything has a finance plan now, cars, TV's, dishwashers. Even clothes on credit store cards.

This means that the total amount of interest paid on finance by your average UK citizen has shot up. More so in recent years. Indeed with student University fees and mortgages many young people start out in life heavily in debt - it has become the default and indeed natural position foe us all.

The chickens are about to come home to roost though. With rising interest rates come higher repayments, relatively falling wages will hurt too. Instead of regulating credit further (we have some of the easiest credit laws in the world, easier than anywhere in Europe by far) the Government chose to make the bankruptcy laws less harsh. Now the daytime TV adverts are often for usury services - debt consolidation has been a growth industry for years.

All this served to do was increase the number of personal insolvencies - not change the culture of no saving and spending tomorrow's money.

Indeed rather than lead by example, the UK Labour Government is setting a terrible example, stealing from all our futures to pay for today's Government services with debt.

I have a fear that as people start maxing out their credit cards paying their mortgages (for that is what anecdotally I am hearing is happening today) we will have a major problem on our hands in the UK. Perhaps the Government plans a period of hyper-inflation to get rid of this problem?

This is one area where David Cameron's broken society theme has some strong economic ties. Moving us away from a pay later culture will help people improve their finances and be able to then make better fist of working their way out of poverty.

I will do a follow-up post on ways to make this work - but all comments welcome.

18 comments:

Anonymous said...

Its an extremely important problem. On top have you seen todays report in the Sunday Times on the Tax Credit fiasco? All extra shit for the working poor. I have the experience in the last few days that all Visa companies are now being told to accept any payment on a debt. I.e they phone and say that you owe then a 200 quid monthly payment and you offer them six quid.... they take it rather than kill yer debt. Boots on the other foot..

asquith said...

Abolish tuition fees, replace them with student grants. (To be paid for by abolishing non-courses and barring the automatic route for not very bright middle-class children to go to university). Thereby, people won't start their working lives in debt and be used to it.

Reform/abolish the tax credits system and make up for it by raising the threshold. Stop having a tax and benefit system so skewed towards people with children: if they choose to have a baby they can pay for it, if they can't do that they shouldn't have had one.

Bring back shame.

Bring back "if you can't afford it, don't fucking have it".

The culture of living beyond one's means has corroded this country, and the blame can be laid at Thatcher and Blair's door. A toxic marriage of unrestrained consumerism and the all-pervasive welfare state have corroded the idea of personal responsibility. (sorry for the mixed metaphors and overly big words, but it's too early to write good English).

I live in hope that the credit crunch will sort things out by convincing people not to be so irresponsible. You can't have it all, you can only have what you earn and you haven't got a God-given right to that holiday in Thailand, that mortgage at 100x your salary, those children that "the social" will cover through the magic money that appears at the post office.

Well, I've offended just about everyone in the world. But if you say that is harsh, I'll tell you that a system which allows this kind of misery to be perpetrated while someone else pays is the real cruelty.

Anonymous said...

I’m not sure whether student loans should be switched back to grants (could be pretty expensive) but I do think they should be drastically reduced. I had a great time at uni, but worked all the way through it. I took all the loan I could too, meaning that when I finished I had about 7k stashed away in an isa.

While working and studying at the same time was an effort, life after uni is still harder so building up to it can only be a good thing. Plus it would make people more likely to put some effort into finding a good graduate job come the final year, and less likely to spend another year living on credit cards and working in a bar. Or at least it would with me….

Letters From A Tory said...

You have the make the banks feel the pain of handing out credit to people who cannot take it on board. There is no obligation for banks or stores to check your financial status before burying you deeper into debt, so I'd like to see the credit card companies made liable to pushing someone who is already clearly and unequivocally in debt further into the red.

Old BE said...

It's a lot easier to run up debt than to pay it off, so getting from a debt-based "culture" to one of savings will be incredibly hard for people and extremely damaging for the consumer economy as many people will have to tighten their belts considerably.

When I bought my flat I rinsed a huge amount of cash using the excuse that I needed x or y for the flat. I ran up a huge credit card bill and got scared so really cut back my spending to pay it off before it got out of control. Many people live right on the edge of their finances which is why the food and fuel price spike has affected many, and paying debts off in that situation won't be easy.

The government should not have made it easy to default either.

Nick Drew said...

with student University fees ... many young people start out in life heavily in debt

we have hardly begun to see the outworkings of this new and (for us, if not for Americans) alien imposition. The 'normalising' of debt measured in tens of thousands for 30-40% of the population in their early 20's (NuLab of course aspires that it should be 50%!) has rapidly gone way beyond the £10k or so from the state-subsidised lending machine: when £10k + becomes normal for these kids, they move seamlessly onto further 10's of k on unsubsidised bankloans, credit cards and overdrafts

this is entirely new to the UK, first-
generation; we can only guess ... perhaps the Crunch has come at an opportune juncture

asquith said...

Dr Ed,

I took into account that student grants would be expensive, and I plan to pay for it by restricting access to universities, with the untalented middle class bearing the brunt. Their automatic right to go to university would be abolished, while more would be done to encourage able working-class children.

There simply is no need for the majority of "universities", especially the former polytechnics, and for them to lower their standards in pursuit of more students is an outrage.

Nick Drew has spoken the truth on this issue, and we should all heed his warnings. The real price will be ghastly if we don't get a grip. Abolish this ludicrous policy of sending 50% to "universities" that are more like factory farms than seats of learning.

The party is well and truly over, and we never paid for it in the first place. Personal responsibility, cutting one's cloth, and not spending more than one earns will never be fashionable, but they are necessary for a halfway decent society.

Prepare for the hangover.

RobW said...

It's simple finance that we seemed to have forgotten.

You can't build a life on hot air...

Unsworth said...

The whole credit fiasco starts at government level. State borrowing is at unprecedented levels - a fine example, then, for everyone else.

Yet the Government continues to piss our cash up against the wall, and the loonies continue to think that they can just borrow their way out of the shit.

Crunch time is now and, as we all know, it's going to get sooo much worse....

Nick Drew said...

There simply is no need for the majority of "universities", especially the former polytechnics, and for them to lower their standards in pursuit of more students is an outrage

too right, Mr Asquith - & since it's a pleasant and sunny day, to lighten the tone I refer you to these postings from last year ...

Anonymous said...

And the gas market is rigged so it gets more and more expensive...rubbish aint it?

Anonymous said...

I agree - this is an extremely important issue. To say that the chickens are coming home to roost is a mild understatement.

I think that as well as the regulatory environment, we need people to assume responsibility for their own actions. A bit of self-control if you like.

Speaking from the position of being an idiot who sacrificed self-control for immediate gratification by maxing out credit cards, loans etc (and now paying the price..) I can confidently say that if I had known the misery and 'slavery' feeling of being constantly mired in debt I wouldn't have been so irresponsible in racking up the debts. However, after beating myself up for several months and cutting way back on all non-essential expenditure, I'm now beginning to escape the worst of it.

I would also remark that whilst the banks and other credit providers should have done more stringent checks (Northern Rock practically begged me to take out a personal loan) at the end of the day, I was the one who signed on the dotted line. One can only blame the banks etc so far.

Both as a country and as a consumer we need to balance our books. I fear, however, that we are a very long way from being able to do that. The picture in the US is rather grim too. Western decadence anyone?

Anonymous said...

Asquith: Well, I've offended just about everyone in the world....


Not me you didn't - so that makes at least 2 of us who are of one mind! Stupid idiots who get themselves unnecessarily into huge debt deserve everything they have got coming to them.

Anonymous said...

Asquith -

If you are going to get rid of the tax credits system, then you would have to first make sure that mortgages could be based on a single income only. Preferable a few years before removing the credits. Dual-income mortgages are a good reason why children become unaffordable.. and you do need another generation.

And, of course, tax credits do make it pay to go to work, something notably absent prior to their existance.

CityUnslicker said...

thanks for all your comments. I am thinking about the follow-up.

This should really be at the heart of any new conservative election plan - mending the broken credit soceity

asquith said...

Andy, raising the threshold would keep incomes at the same level. It would also end discrimination against the under 25s and the childless, who have consistently lost out under the tax and benefits system.

Which brings me to a long-standing point of mine, that all this about "child poverty" is essentially dishonest shyte. Because it isn't children who are poor, it's their parents. They are poor because they are badly educated and either don't work or toil away in low-paid jobs without a realistic chance of getting anywhere. So rather than shuffling money around, extend true opportunity and we'll all be quids in.

Because we are now in the Speenhamland System Part 2, and I for one am raising my voice against it.

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