In recent times, the average level of UK consumer debt has been on the increase. We ask why this could be and whether it actually matters.

According to the latest Bank of England figures, Britons now owe £1.46 trillion. Most of this (£1.23 trillion) is mortgages. However £231 billion is unsecured consumer credit, of which, £54.5 billion is owed on credit cards.

This is in contrast to 5 years earlier in 2004 where total UK personal debt (including mortgages) was £956bn. These figures increased from £399bn in 1994. There are now more than 64 million credit cards in the UK more than one for every man, woman and child. Britain is now the only country in Europe with more credit cards than people.

So why has the level of consumer debt risen to such an over the past 15 years? Arguably there is no single answer. However there are some underlying trends on both the side of borrowers and lenders which can help us understand what has happened.

Consumers are increasingly willing to borrow

Today’s society in the UK is driven by consumer marketing. Every day we (and our children) are bombarded with media advertising for goods and services. This advertising frenzy seems to have broadened our horizons to what could be ours if only we can afford to pay for it.

In parallel to (or perhaps as a result of) our broadened horizons, our ideas of the minimum standard of living we expect has increased dramatically in recent years. Arguably the norm is no longer a single car parked on the drive and one family holiday per year. Now it seems perfectly reasonable to expect two cars and two foreign holidays.

Changed expectations are also evident when we consider moving into our first property (whether bought or rented). Gone are the days of moving into the property and then saving for our first piece of furniture, washing machine and television. Today as a minimum, we expect to move into a fully furnished home with all available kitchen appliances.

However, in most cases, family incomes have not kept pace with living standard expectations. As such, instead of saving now and buying later, we have developed a have now and pay later attitude funded by credit. Today, instead of debt being frowned upon as socially unacceptable, we now seem to be perfectly at ease to use credit to fund our expectation of living standard.

Increased willing by banks to lend

Clearly, an increased willingness to borrow means nothing without a willingness from banks to lend money. Since the mid 1990s, personal credit available from the banking industry saw steady increase. The banking industry was more enthusiastic than ever to lend money to use in the pursuit of achieving the consumer’s expected standard of living.

Despite the more recent credit crunch, if we want to buy a new car, it still remains relatively easy to apply for a bank loan. It is almost impossible to walk into any shop without being offered credit via a store card scheme and our letter boxes are constantly filled with offers from credit card companies.

Is the level of consumer debt in the UK a problem?

The act of accumulating debt is arguably not a problem in itself as long as you can afford to maintain the required monthly repayments. However, in a period of economic downturn such as the one currently being experienced in the UK, the risk is that consumers will suffer a reduction in income or lose their incomes all together.

If this happens, consumers are left unable to repay their borrowing leaving banks and financial institutions with debts which will not be repaid. The number of people struggling to repay their debts and declaring insolvency is certainly on the increase. According to the Insolvency Service, 33,000 individuals declared themselves officially insolvent in the second quarter of 2009. The highest volume in any quarter since records began.

This is a significant worry for both banking institutions and the government. The underlying reason for the credit crunch has been banks unwillingness to continue to lend because of the level of bad debts they have experienced. The UK government is currently trying to restart bank lending and subsequent economic activity through the process of quantitative easing (QE) – artificially pumping money into the economy through the purchase of government bonds.

However, if consumers continue to default on their debt repayments, banks are likely to hold onto the additional cash balances they receive through QE to protect themselves against further future bad debts rather than lending out this extra money as the government wants.

The effect of ongoing consumer defaults is therefore likely to dampen any positive effect that putting additional money into the economy is likely to have. As such, the level of consumer debt in the UK, and the risk that it will not be repaid is certainly worrying as this will act as a significant brake to any economic recovery.