Buy Now, Pay Later, Go Broke!

As personal debt hits a record £1,300 billion, be careful when you read reassuring spin from the banks.

According to figures released by the Bank of England today, our personal debt mountain hit an all-time high of £1,300 billion (£1.3 trillion) at the end of January. I remember when this figure first exceeded the trillion mark in mid-2004. Since then, we've borrowed over £300 billion in 33 months, which is going it some!

However, mortgages account for over five-sixths (84%) of this debt, and our mortgage debt has soared in line with house prices, as I explained in Nineteen Years Of Rising Mortgages. Nevertheless, consumer credit (non-mortgage borrowing) has also soared in recent years, largely because, as a nation, we seem incapable of spending less than we earn.

For the record, here's how our total debt burden has grown since January 1994:

Source: Bank of England

As you can see, personal debt has tripled in the past twelve years, rising from £439 billion at the end of January 1995 to £1,300 billion in January 2007. This equates to a growth rate of almost 10% a year compounded. Given that our after-tax disposable income has risen by 5% a year over the same period, it's clear that our appetite for borrowing has turned the UK into a nation of 'credit junkies'.

What's more, we need to tread carefully when looking at the issues surrounding debt, as there's a lot of spin published by vested interests. For example, lenders have drawn attention to recent falls in credit-card debt. However, what they've largely failed to point out is that although credit-card borrowing has declined slightly, this fall is easily outstripped by a rise in borrowing using personal loans.

Furthermore, total credit-card debt has been reduced partly because several leading lenders have taken to 'securitising' their credit-card receivables.

In short, a lender turns packages of credit-card debt into bonds which are sold to investors. Repayments on these credit cards provide bondholders with an income, and the debt is removed from the lender's books, releasing more capital to lend elsewhere. However, this securitised debt -- now a bond -- no longer counts as a debt in the Bank of England's eyes. In effect, the Bank's figures give a rosier picture of our credit-card debt than is actually the case.

Thus, when you see reassuring comments from lenders about the state of our financial health, do take them with a pinch of salt. It'll take a lot more than carefully crafted press releases to convince me that we Brits are weaning ourselves off our addiction to over-spending and borrowing. 'Buy now, pay later' may sound like a great idea, but spending tomorrow's money today ultimately makes you poorer further down the line.

To be blunt, if you'd like to gain control of your personal finances, learn to budget and start living below your means. Otherwise, you'll be opening your bank and credit-card statements in five years' time and wondering where it all went wrong!

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