Credit-card debts may lead to plastic meltdown

Credit counsellors and financial analysts in the US and the UK are seeing evidence every day that credit card debts are increasing. Soaring fuel costs, rising food prices and climbing energy bills are all being kept at bay with credit cards. Shortfalls on mortgage repayments are also being made up with cash from credit cards. Many of these debt soaked consumers were already struggling to make their minimum monthly repayments.

More than $1 trillion is held on credit cards in America. In the UK, debts of more than pounds 50 billion have been run up on the plastic. Across the world, somewhere between $2-3 trillion is owed on credit cards.

Up to now, the credit crisis has passed by without plastic going into meltdown. Statistics have shown steady levels of arrears and suggested that many consumers have been successfully paying off part of their balances. Now there are increasing signs that this last breakwater, shoring up the economies of the western world, is about to crack under ever-increasing strains.

“Credit cards are definitely going to be one of the next big problems,’’ said Steve Nuttall, head of the financial-services research group at polling company YouGov. “Our research shows that everything started to fall off a cliff in about March or April and that should begin to show up in bad-debt charges by the end of the year.’’

The US Federal Reserve has also been warning credit-card lenders not to push their luck. The regulators are fearful that the economy could crack if consumers start being hit with higher fees and steep interest rate rises. The problem may be even sharper in Britain.

Analysts always say that “the markets get it right’’. Current market prices suggest that over 20% of the money owed on British credit cards is unlikely to be paid back. That would be almost three times higher than the previous record for bad credit-card debts, eclipsing the problems witnessed in the last housing crisis of the early 1990s.

“We are already hearing stories about people using their credit cards to keep up with their mortgage payments,’’ said Peter Crook, chief executive of Provident Financial, the doorto-door moneylender. “If that’s what’s happening, it’s a big red warning sign.’’ The recent Bank of England credit-conditions survey revealed that banks were surprised by the level of bad debts run up on their credit cards in the second quarter of the year. Demand for credit cards also increased as banks tightened their lending criteria across the board.

The UK’s debt-strapped consumers currently owe a staggering pounds 56 billion on credit cards. According to figures from Apacs, the payments network that supports the British banking system, this could climb to pounds 160 billion if those 31m cards are used to the max. The figure takes account of all the measures already taken by credit-card issuers to clamp down on borrowers by rejecting card applications and cutting credit limits.

YouGov’s research suggests that 15% of the British public is now behind on at least one bill of some kind or another. Of those in trouble, 38% say they are behind with utility bills or council tax, while 31% cite credit cards as their big problem.

Problems in credit-card debts have the potential to send a new wave of panic through global financial markets. Roughly $600 billion of debts run up on credit cards world over swill through the global financial system. Credit-card debts were packaged up and sold on by banks during the boom years, just like mortgages and car loans. THE SUNDAY TIMES