‘I want to go
shopping but have no account balance to spend.’
‘Why don’t you just
swipe your credit card?’
This may have become
one of the most commonly used catchphrases of the twenty first century. And
there’s a good reason why. Every second in the UK, 126 purchases are carried
out using credit cards. They are one of the most popular financial products and
there is certainly no doubt about that.
Even with absolutely
no cash and no balance in your account, you can still go shopping around the
world. For shopaholics, this is nothing less than nectar of the gods.
Credit Card Debt
It would be unfair to
say that each individual who uses a credit card fails to pay their due on time
and contributes to debt. But if we were to inform you of the status of credit
card debt in the UK and USA, you will be compelled to believe that it could
actually be the case.
As of today, the
total credit card debt in the UK is close to £70bn, whereas in the USA it
amounts to over $1 trillion.
Just to give you an
idea of how huge these numbers are, let us make a comparison. The total GDP of
India is close to $2.4 trillion, so the credit card debt in the USA is almost
half the GDP of the sixth largest economy in the world. This figure clearly
indicates that the misuse of credit cards may have infiltrated many households.
The
credit card balance of an average UK household is estimated to be around
£2,504.
The credit card
balance of an average American is estimated to be around $6,375, which has
risen by almost 3 per cent compared to last year.
It not only sheds
light on the unhealthy financial practices that so many people indulge in, but
also speaks of the possibility that a recession may be just around the corner.
According to an
analysis carried out by the Bank of England and FCA, most people in debt have a
tendency to shift debt from one lender to another. This merely shifts the
burden of the debt from one financial organisation to another but doesn’t
really help the overall debt crisis in the country.
Credit Cards are
believed to be one of the biggest contributors to debt, which led to a near
collapse of the Wall Street in 2008 and introduced the world to the phenomenon
of a subprime crisis, a mini recession in itself.
However, banks and
financial institutions need to be more cautious now than they have ever been in
the past. The global recession of 2008 had left a gaping hole in many economies
around the world. A hole that took longer to fill than to create.
Relation between Credit Card and Credit Score
The next question
that may turn up in your head is why are credit card companies continuing to
issue cards to those who cannot pay back their dues. But why shouldn’t they,
when the average credit score has increased as well?
As surprising as it
may sound, despite the high levels of debt, the average credit score of a UK
citizen is 380 on a scale of 0 to 700, with 380 qualifying as a fair credit
score.
Credit scores in
America range from 301 to 850. The average credit score of an American is 675,
which is at its highest point since the recession.
Credit scores follow
the principle of ‘the more the merrier’ and when the average credit scores are
so high, it means that the banks view this segment of the society as potential
credit card users.
According to the
basis on which credit score is decided, these potential credit card users are
also quite trustworthy in terms of paying their debt. But this may not be the
first time that the numbers have lied.
In any rapidly
growing economy, as the Purchasing Power Parity increases, the
confidence to tackle debt increases too. As a result, many working individuals
believe that irrespective of the size of the debt they may have accumulated,
they will surely find a way to pay it back. But certainly not every individual
got this bit right in 2008.
A Cyclic Effect
The slowdown of an
economy can never be entirely blamed on one factor. If the personal debt of a
nation rises beyond a certain point then one cannot say that personal debt is
acting like the third wheel of an economy.
In the past few
months, growth in earnings has been meagre and inflation has reached new
heights, forcing households to seek help to manage their personal finances.
Personal borrowing on
loans, credit cards and car finance has risen exponentially and now stands at
almost five times the rate of growth in UK pay. These factors have indirectly
weakened the pound and as a result the costs of imported goods have also
increased since the Brexit vote.
Credit Card Debt Statistics
1.
When we
speak about credit card debt, it not just includes those customers whose due
date was just a day or two back. There are many people in the United Kingdom
who have accumulated such debt over a long time, in certain cases, as long as
two years.
2. This has thrown further caution to the wind regarding the guidelines
that are being followed by many financial organisations when providing
customers with credit cards. Organisations are being asked to issue alternative
finance to those who are credible enough to pay them back.
3. Data collected from banks show that personal debts are currently at
their highest and have reached a total of £200bn. Credit cards account for more
than £70bn of the total personal debt.
4. The subprime crisis of 2008 taught the banks that it is not a wise idea
to lend money to people with poor credit scores. One can say that the banks
learnt their lessons and since then have only extended their finance to those
with good credit scores. Thus, the growth in consumer credit at this time poses
much less risk than the growth in consumer credit back in 2008.
0 Comments