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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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