Debt Unlimited?

Britons have become increasingly adept at managing debt, with a whole generation growing up inured to the fear of finding themselves in the red. Recently cumulative debt in the UK topped £1 trillion, with the rates of borrowing continuing to spiral. As credit card lenders and persona loan providers adopt increasingly competitive marketing techniques and competition drives the available rates down, it has become easier and easier to secure capital. While scare stories abound on the consequences of unmediated borrowing, some say it is now time to revise our perception of debt – including the upper limit for loans.

Currently the Consumer Credit Act of 1974 governs the market. Under these terms an upper limit of £25,00 is in place for any agreements between individuals and traders.

Yet as inflation continues to rise and the public become more "debt-savvy" there are those who think it is time to raise the upper limit. This week Mervyn King, governor of the Bank of England, admitted that existing rate of inflation had in fact been an eye-opener even for the experts.

"The MPC has been surprised by both the slowdown and the rate at which inflation has picked up," he acknowledged.

With prices escalating, it seems £25,000 is not quite the lump sum it used to be.

Indeed, with the average student expected to have debts of £15,000 well into their thirties once the government's loans for top-up fees kick in, the sum is likely to dwindle even further in real-terms. In this context the limit of £25,000 is effectively only generating an additional £10,000 for a graduate.

One other reason for reviewing the upper limit for loans has been the change in the social stigma attached to debt and its ubiquity. Young people and students in particular are now well-used to managing debt, with the rise of the so-called "rate tart" – those who hop from one zero per cent interest rate to another – indicative of this.

However, in many respects the fact that the UK is becoming more accustomed to debt is one reason why the upper limit for loans should not be changed. In such an environment, when people as young as 20 can find themselves in insurmountable debts, the prospect of the loans continuing to mount is arguably not the way forward. Not since the last recession has there been such a bottleneck of people in debt, with charities and the credit industry warning of a surge in people unable to foot the bill.

Figures this month released by the Department of Trade and Industry (DTI) show a marked rise in bankruptcies. Crucially those most at risk here are young people, as the Consumer Credit Counselling Service (CCCS) spokeswoman Frances Walker explained to the BBC.

"We are seeing lots of younger people coming to us for help," she commented this month.

"They are often very heavily in debt as they have been able to borrow far more than in the past.
With no assets to fall back on the repayment of credit cards or personal loans can quickly escalate."

For older debtors with families the burden can go beyond balancing the books to produce a sense of failure in the face of overwhelming debts. Earlier this year Richard Cullen killed himself after hiding the scale of his debts from his wife of 18 years after credit card repayments began to pinch.

Whatever the rules governing debts, it seems borrowers should tread carefully when looking to secure extra capital.