Should Personal Debt be more strictly controlled?

During the past 10-15 years, personal debt in the UK has reached unprecedented heights. According to recent figures published by the Bank of England, Britons currently owe around £230 billion in unsecured debt. This does not include mortgages.

I have long argued that personal debt in itself is not a bad thing. There is only a problem when an individual cannot maintain the required repayments. However his situation has dramatically increased since the onset of the recession. Over 60000 individuals declared themselves formally insolvent in the first half of 2010, the highest number since records began.

Is access to Personal Debt important?

While no-one wants to see an increase in the levels of unsustainable personal debt, the vital role that the flow of credit plays in our economy must also be recognised. Credit allows people to overcome short term financial obstacles and seize on opportunities to improve their careers and lives.

As such a balance must be struck between flexible access to credit while protecting individuals from over-indebtedness. We need to start taking steps which will ensure that we prevent credit from getting out of control and causing real economic hardship.

So what is the answer? Should banks be tighter controlled so they lend less? Or should responsibility be put on the shoulders of individuals so they borrow less?

Should bank lending be more restricted?

Before extending credit facilities should lenders should be required to do a more in depth analysis of an individual’s credit worthiness and current levels of personal debt? This suggestion seems very sensible. However, it may require an increase in the sharing of financial information about individuals between large financial institutions. This situation involves significant questions about personal privacy and therefore will be difficult to police.

Should restrictions be placed on the amount of interest which can be charged on certain financial products for example credit and store cards? This is an idea which would be welcomed by many. However, the credit industry may then argue that the risk of providing certain facilities would outweigh the reward. As such, the variety of financial options open to the consumer could be restricted.

Should minimum payments on credit cards be raised and credit card companies restricted from increasing individuals credit limits without prior consent? This does seem sensible as it would result in debts being repaid more quickly. However would it push some into financial difficulty?

Should individuals take greater responsibility for their finances?

I believe over regulation in the  personal finance industry would lead to reduced consumer choice. I am more in favour of individuals themselves taking more responsibility for their finances and borrowing sensibly. However there is no easy way to achieve this.

There is no doubt that more should be done to increase young people’s awareness about how to properly managing their finances. Many adults require education in this area as well. One way of achieving this is through the internet.

There are now more and more financial self help web sites which provide resources and support for people who require help with managing their finances, budgeting and dealing with personal debt. Many credit providers are also starting to put help and support at the centre of their bushiness. This idea should be consolidated, replicated and made the rule rather than the exception.