Backs to the wall

But the poll shows that the middle-classes are also falling victim, with 4 per cent of the most affluent ABC1s saying they used their credit cards in this way. And it also reveals that householders in the well-off South East are being clobbered hard for the first time.

Debt experts fear that the findings reflect a growing trend for families whose access to other forms of credit has been cut off to resort to credit cards in a last ditch effort to save their families from disaster.

Aggressive action

Heather Keates, director of Community Money Advice, says fewer people are asking for help with mortgage arrears because of the decline in interest rates – but credit cards are the source of hardship for many families as a result of increasingly aggressive action by credit card companies to recover their debts. The companies lack of forbearance contrasts sharply with mortgage lenders adherence to government guidelines.

‘The biggest change within this whole sector is the way credit card companies are dealing with non-payment,’ Keates says. ‘They are very quickly going to charging orders on property. In the past, that was a rarely used tool, but what they are now doing – securing debt against a property – is storing up trouble.’

Once a credit card company has obtained an order, it can go back to the court for a possession order to force a sale to recover the debt. This is how the indebted family can end up losing their home.

‘These second charges are starting to come home to roost with companies trying to enforce charging orders,’ Keates says. ‘Although the government has put in place guidelines that orders shouldn’t be enforced, it is up to the judges. If judges don’t know about the guidelines, they will make an order and that is a huge area of concern in terms of potential homelessness.’

She also points out that repossession or eviction can be threatened as a result of relatively minor sums. ‘What could be only £400 or £500 of credit card debt can escalate and quickly end up as £2,000, £3,000 or more as a charge against the house. Then the collection companies have a massive amount of leverage against the debtor.’

Stuart Freeman, director of advice services at CHAS Central London, says there had been an alarming increase in the number of people using credit cards to augment their income and pay day-to-day expenses. ‘Lines of credit have been closed off for many families – they can’t remortgage or increase their overdraft – and they’re looking to raise money in other ways.’

People can get into serious trouble – and run up massive credit card debts – before it all comes crashing down. The sums involved can be astronomical. ‘The amounts usually start at around £10,000 and can go up to more than £100,000. We have one case, a shared owner of a property with 50 per cent equity, who’s got credit card debt of £141,000 on 14 separate credit cards, which exceeds the net equity by more than four times.’

And there has been no let up in the pressure credit card companies put on borrowers when they get into difficulty. ‘If creditors know you have an asset, they’ll go down the route of getting a county court judgment to attach a charging order and then going for an order for sale,’ Stuart Freeman says. The courts may be loathe to give orders for sale, but the number of applications have increased and, as a result, more borrowers fear losing their homes.

ROOF Poll

ROOF’s poll findings come in the wake of disturbing news from the lenders that they are intent on raising credit card interest rates in an effort to combat bad debts and the threat of government restrictions on lending. Already, bad loans amount to 6 per cent of outstanding balances and they are likely to increase to 9 per cent by the end of 2010, according to the accountancy firm PricewaterhouseCoopers (PwC).

The poll, conducted in the first week of November, contrasts with the same poll carried out for ROOF in September 2017, in the days after the Northern Rock collapse, before the recession – and the credit squeeze – really began to bite.

It suggests that the steep fall in the cost of servicing mortgages, the cut in VAT, and other moves aimed at reducing household bills have not been enough to pull many families out of the red. Low income families living in rented accommodation, who spend very little on items such as clothes charged at the lower rate of VAT, will not have benefited from the moves. And though the 36 per cent of borrowers on tracker mortgages have seen a big fall in their monthly payments, the 56 per cent of borrowers on fixed rate deals have not got cheaper loans.

One of the biggest shocks is the rise in Londoners who have resorted to plastic to pay their mortgage or rent. Their number has gone up by 40 per cent from 6 per cent in 2017 to well over 8 per cent (1 in 12) now. The rise shows the extent to which the prosperous South East is feeling the pinch after years when the north bore the brunt of the recession.

Last time, the Midlands and Wales were the worst affected, with almost 10 per cent paying by credit card. But the levels in both these areas have drastically fallen – halving to 5 per cent in Wales and down by more than two thirds to 3 per cent in the Midlands.

The North, the area hardest hit by the recession, saw a 25 per cent fall from 6 per cent to 4.5 per cent.

But the most alarming change was in Scotland, where there was a 150 per cent rise from 3 per cent to more than 7.5 per cent of householders. The figure is second only to London.

Renters at risk

Damon Gibbons, chair of Debt on your Doorstep, believes the poll reflects the impact of rising unemployment. ‘When people lose their jobs, they panic about how they’ll meet their mortgage commitments or pay the rent – and they may use credit cards while they sort themselves out.

‘Bank of England figures show the general trend is that people have been paying down the amount of debt they are holding on credit cards. In the third quarter, there was a 14 per cent reduction in the total amount owed on credit cards.

‘But that overall healthy trend hides the real difficulties that some groups are facing. People on tracker mortgages will have seen their costs come tumbling down, but that doesn’t apply to people who’ve been moved over to standard variable rates, or those with sub-prime mortgages paying up to 8 per cent interest or above or people who tied themselves into long-term fixed interest deals at high rates of interest.’

The problem doesn’t only affect people with mortgages. ‘Renters, particularly social renters, are much more likely to be in trouble because they spend a greater proportion of their income on debt repayments than wealthier households,’ Gibbons says. ‘A recent survey showed between 19 and 25 per cent of their income went on servicing debt.’

Another factor pushing up the level of debt was that interest on credit card balances had not fallen in line with the reduction in rates on other forms of loans – including mortgages. And people on lower incomes, if they can obtain a credit card, are charged extremely high rates of interest – sometimes upwards of 30 per cent – because they are deemed to be a greater risk of default.

‘They pay a higher price for their credit and these higher rates place an additional strain on their budget. What we need to be doing is helping these households more and reduce the cost of credit to them, so they can ride out the storm without having to turn to further borrowing,’ Gibbons says.

But the people really at the bottom, the lowest 10 per cent of earners, who also have a mortgage, are the ones most likely to end up facing homelessness, as our poll shows. ‘The Bank of England’s average figures don’t really tell you about people in that position,’ Gibbons says. ‘The 10 per cent of low earners with a mortgage have a secured debt to income ratio of more than 50 per cent and they really have huge problems.’

Peter Tutton, social policy officer for Citizens Advice, agrees that rising unemployment is likely to be a factor. It might be OK to use credit cards as a short-term strategy, he says, but the long term effect can be catastrophic, if the drop in income persists and debt builds up.

‘Credit card debt is the biggest single issue among CAB clients,’ he says. ‘More than 300,000 people come to us complaining about credit cards every year. And the number has steadily increased – apart from a drop in 2016-17, we’ve seen a continued rise and the numbers have grown rapidly during recession.

‘People in serious mortgage difficulty nearly all have high levels of unsecured debt, including credit cards. Whereas before they could have remortgaged, it is almost impossible now as lenders become more and more risk averse. They end up in a cycle of debt dependency which is hard to escape.

‘Using a card may be the only credit line available to them – but it is a dangerous strategy. If someone in the household is still in work, that could disqualify them for the government mortgage support scheme and they may face the prospect of losing their homes.’

Gender gap

The poll showed that men are still more likely than women to use credit cards, but the gap between them has widened in the past two years. For while the number of men has risen a percentage point, the number of women has shrunk by 1.5 per cent.

Younger people are using their cards to the max in far greater numbers than older people, who are sometimes reluctant to take on credit cards for fear of increasing debt.

Last time the 18-24 age group outstripped other age groups and they have seen the biggest rise in the past two years, by more than two thirds to 12.5 per cent. That’s exactly one in eight 18-24-year-olds who are now in this position.

But, despite evidence of growing insolvencies among the over-50s, according to our poll, older people in the 55 and over age group who are coming up to retirement have reduced their burden by about two fifths to 4 per cent.

Most major credit cards charge interest on outstanding balances at between about 12 and 18 per cent – but some cards are still charging upwards of 30 per cent. A few have interest rates of around 50 per cent. The highest rates are on cards marketed at people with poor payment records, who are usually people with the lowest incomes.

‘We’re seeing a lot more people coming to us for help with rent arrears,’ Keates says. ‘People on the lower end of the pay scale are finding it increasingly difficult to gain access to credit. We’ve seen an explosion in the use of pawnbrokers and payday loans as well as credit cards among people who are desperate to get their hands on quick cash.

‘But when people are having to rely on credit cards, they end up not being able to service that borrowing and so they have to use another credit card to pay off the first one. Then maybe someone offers them a consolidation loan and they still haven’t got rid of their credit cards. They’re always living outside their income so the situation is always going to get worse.’

PwC calculated that the average UK household had unsecured debt – including credit card loans – of about £10,000, on top of secured debts such as mortgages averaging £60,000. Households spent 15 per cent of income after costs and taxes ‘purely to service interest payments’ on these debts.

Despite restrictions on borrowing, personal debt has been growing. Britons took out more debt that they repaid during the first part of 2019, according to the financial adviser website unbiased.co.uk.

But Gibbons offers a crumb of comfort for middle-class households that have found themselves facing a financial crisis, which they hope will only be temporary and will be solved by the use of a credit card. ‘The fact that it is hitting higher earning households shows that unemployment is rising among the middle classes. Professional jobs are being lost as a result of the recession, but the chances are these more highly skilled people will be able to find jobs much more quickly.’

A government white paper in the summer called for a clampdown on credit card lending. But as banks tighten up on other forms of borrowing – big restrictions on mortgages and secured loans – it seems households are turning increasingly to credit cards to make ends meet.

And there are worrying signs that borrowers may have been encouraged to increase the size of their loans by the lenders’ practise of raising credit limits without the borrowers’ consent, which has made it easier for them to rack up massive debts. According to uSwitch millions of customers had their credit limits increased in the past year.

Timebomb

And more and more people have turned to using credit card cheques, which can be used like personal cheques to pay bills, but the interest rate on them is higher than on ordinary credit card purchases. The government has asked the Office of Fair Trading to examine these practices, while consumer groups want the credit card cheques to be banned.

But with Christmas, the highest spending time of year, coming up and the prospect of large utility bills for gas and electricity in January, the use of credit cards to pay the mortgage and rent is likely to be the only way out for an increasing number of families.

And with the levels of personal debt for many of them continuing to mount, we could see an impact on repossessions and evictions at the start of the new year.