Over the past few years, the British have grown so "extremely comfortable" with using credit cards that in 2003, the number of cards in circulation surpassed the number of U.K. citizens. It was reported that in 2004, consumer debt topped £1 trillion – for the first time ever.
So comfortable that British credit card companies expect the number of cards in circulation to jump another 40% by 2008.
But all this "comfort" comes at a price. In the third quarter of 2005, for example, the British filed 31% more personal bankruptcies than the year before – “the largest number since 1960,” and a new record. And now banks are starting to get hit: Many banks and finance companys' profits were down after charges relating to writing off bad debts rose.
What's more, a high percentage of borrowers who owe more than £10,000 in unsecured personal debt are considering making themselves insolvent.
Already this year, there are 66.3% more individual insolvencies in England and Wales than in 2005.
It’s not just a British problem. For example, 40% more Germans filed for bankruptcy protection in 2005 than in 2004. And with interest rates rising, other citizens of the European Union may soon join in. Of course, on this side of the ocean, things aren’t any better: Through October 2005 alone, U.S. consumers filed 49% more cases than in 2004.
British analysts blame this trend on the softening in bankruptcy rules, higher interest rates and the appeal of the type of insolvency called Individual Voluntary Arrangements, where payments are based on what the debtor can afford.
All of that rings true, but why are consumers borrowing so uncontrollably in the first place? Don’t they know that one day, interest rates can rise? Or that house prices, which have financed comfortable lifestyles for thousands of homeowners, may one day fall? Or that, if nothing else, they may simply lose their job?
They know. But they hope for the best. And like many other cultural and economic trends, the "borrow and spend now, pay later" mentality is sign of the times. Contrary to the conventional wisdom, however, it's a sign of good times, not bad.
Near the end of every major expansion, few creditors expect default, which is why they lend freely to weak borrowers. Few borrowers expect their fortunes to change, which is why they borrow freely.
Willingness to lend or borrow money, just like willingness to buy or sell stocks, is determined by the health of society’s overall mood – or social mood. Its best-known indicator is the stock market. Notice that as European stocks have climbed since early 2003, so has consumers' willingness to borrow. It's no surprise: Both trends are the results of improving investor and consumer sentiment and a direct reflection of rising social mood.
The U.K.'s mountain of personal debt continues to have no peak in sight. Managing debt and finance is a self responsibility act as it not only affects oneself but often drag the whole family into financial hardship.
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