Credit card debt a threat for future 

Forget the sub-prime mortgage crunch, it's Britain's mountain of credit card debt we should be worried about.

There's no such thing as the never never. The time always comes when debts have to be paid, in full or part, whether a credit card, mortgage or personal loan.

Even when people default on their debts, the cost or loss is just passed back to the lender to carry.

So there's little wonder that financial advisers are already whispering about the dark cloud of credit card debt looming in 2009.

With unemployment expected to hit two million by the turn of the year - maybe reaching three million in 12 months' time, according to some forecasts - how will people keep up with their monthly payments?

If they can't keep up their payments, that's more bad debt for the banks to swallow at a time when the banking system is already tottering.

Two out of three Britons have a credit card; typically a couple of cards from different providers. Collectively, we owe £55.7bn.

To put that into perspective, the taxpayer has just bought half of one of Britain's biggest high street banks, Royal Bank of Scotland, for a mere £15bn.

So, as one financial adviser whispered recently, forget the American sub-prime crisis.

What we should be worried about - and planning for - is the plastic crunch coming next year.

Looking at figures from the British Bankers' Association published this week, consumers paid back more than they spent on their credit cards for all but 10 of the last 33 months.

But the overall level of credit card debt still increased - and largely because of the relatively high rates of interest charged on plastic.

In October, for example, credit card debt rose by £248m, despite consumers spending £7.1bn but repaying £7.33bn.

The average interest rate charged on a credit card has risen to 17.6pc from 17.2pc in May, according to market analyst Defaqto.

This is despite the Bank of England's decision to cut the base rate from 5pc to 3pc.

Research carried out by Moneyfacts.co.uk showed that 10pc of credit card providers had increased their interest rates since August.

At the same time 12 cards have raised the interest they charge on cash advances, hiking them by up to 5pc in some cases, and seven have increased their cash advance fees.

Other charge increases include 11 cards raising their balance transfer fees, while seven have reduced the number of interest-free days holders benefit from, and four have increased their foreign usage fees.

Consumers can still take out 0pc interest balance transfer deals, but firms are also reducing the options in this area, with one in 10 credit card providers withdrawing their 0pc deals during the past year.

At the same time, the average length of time for which the 0pc rate applies has also fallen, dropping from 10.1 months to 9.5 months.

Consumers are also having to pay increasingly hefty fees to take advantage of the deals, with these now typically 3pc of the sum being transferred, compared with nothing when the deals were first introduced.

Credit card providers are increasingly turning to so-called risk-based pricing, under which the interest rate people are charged is based on the risk of them defaulting on their debt.

The problem for plastic providers is that although the base rate has fallen, the rate at which banks lend to each other is still relatively high.

Prime minister Gordon Brown has urged credit card firms to behave “responsibly” and business secretary Lord Mandelson warned this week that they could face an Office of Fair Trading investigation if they fail to stamp out bad practice.

The next challenge will come next week when the Bank of England holds its monthly meeting to set interest rates.

If the bank decides to cut rates again, how will the credit card providers respond?