As insolvencies rise, credit card spending is slowing. Is the nation finally realising that debt is a problem?
A couple of weeks ago, the Office of Fair Trading wrote to 17 debt management companies warning them to stop publishing misleading information in their adverts in newspapers and on TV. These are the sort of companies that have been promoting the use of Individual Voluntary Arrangements (IVAs) as an alternative to bankruptcy.
An IVA usually lasts five years, during which time an insolvency practitioner effectively takes control of the debtor's income. After agreeing an amount for personal living expenses, any surplus is distributed among creditors on a pro-rata basis. When the IVA expires, the rest of the debt is written off.
Unfortunately, some of these adverts have made IVAs sound easy and they're not. They're expensive to set up, you have very little control over your money and it's a long hard slog that many people find too difficult to deal with. It's not unusual for someone using the IVA route to end up going bankrupt anyway. For these reasons, IVAs are not suitable for the majority of people.
Nevertheless, the adverts have clearly been working. The number of people choosing IVAs last year more than doubled with the result that, combined with increasing bankruptcies, a record 107,000 people were declared insolvent last year, according to the Insolvency Service. That's an increase of 59% on the year before.
While all this is rather worrying, there are signs that Britain is beginning to wake up and smell the coffee when it comes to debt. Amazingly, for the first time ever, spending on credit cards is coming down. APACs tell me that, in 2006, spending fell by 2.2% compared to the previous year.
For the most part this is because people are using their debit cards far more -- debit card spending was up by 15.2% in 2006 compared to the previous year. But it does mean that consumers are moving towards buying things with real money held in their bank accounts rather than borrowing it (although I suppose some people could be using an overdraft facility, but you get my point).
Unfortunately, people are still increasingly borrowing via their mortgages which is why the total amount of personal debt in the UK is now currently nudging an estimated £1.3 trillion.
Still, this is at least an indication that when a consumer opens his wallet for day-to-day expenditure, he is more frequently reaching for his 'real money' debit card rather than borrowing on his credit card to make a purchase. It means he's giving some thought to how to pay for something and that is surely a good thing. It's a start, at any rate.
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