Is there a crisis looming for British credit cards to match that of the recent turmoil in the stock market? There is a fear that debts on credit cards in this country could ignite a fresh crisis in the global financial system.
Consumers in Britain owe more than £1.3 trillion in debt, £50bn of which is on credit cards. As card holders run up their debts with popular providers such as Barclaycard, MBNA, Egg and others, so they have sold off their debts to the capital markets in recent years. A lot of these securitised debts are now held in collateralised debt obligations (CDOs), the funds which have been at the heart of the downfall in sub-prime markets in the US.
It is now thought that as British consumers and homeowners have increasing trouble in paying off their mortgages as the interest rate rises really start to bite, they will turn to their credit cards to pay off some debts in the short term. In turn, this will increase the pressure on them to keep up with credit card repayments. The follow on from that will be that they begin to miss their credit card payments. If that does happen then the CDOs may have their credit rating cut. The consequences of that could spark more fears in the financial markets as CDOs have been used as collateral against other debts in the market.
Last week the Bank of England showed that £9bn of debt has been written off by British banks in the last year, an increase of 20% on the previous twelve months, and the highest recorded annual figure since records began in 1991.
Credit rating agency Moody’s also came up with data showing that American credit card companies had seen an increase in bad debts by 30% over the last year, and late payments on cards were also up.
It seems like another problem is simmering.
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