Debt, debt, debt: February 2008 Archives

So then, another rate cut on Thursday takes the UK interest rates down to 5.25% from February. There was a similar quarter % cut in December, but the Bank of England refused to panic in January and slash rates - unlike the Fed back home.

Stock market turmoil seemed to force the Federal Reserve to cut its target rate substantially last month. It now sits at 3%, although just one month prior it had been at 4.25%. In the short term, a little more positivity has returned to the world markets, but they haven't made a full recovery to pre January levels, having endured a terrible start to the year. Things look as though they might get ugly again soon as well, with stock markets regularly going into the red this month. The Dow Jones has a massive loss on Tuesday (5th) and it makes me a little worried about things.

If, like me, you've got some stocks, then you might be looking for a good moment to pull the plug. I know I am! I want to have my money out for about this time next year, and with things being forecasted to be bad in 2008, I'm not feeling too good about the whole venture. I bought some in mining company Rio Tinto after they received an offer from BHP in November, and it's been quite a roller coaster ever since! Basically, if my stocks break even again, then I'm out of the market. I kind of wish I'd just stuck my savings into an ISA or something for the longer term, but I'll always say that in retrospect.

While the interest rate cuts will probably help the stock market momentarily, I'm sure it'll also be music to the ears of many people who own property over here. Mortgage rates have been going up with interest rate rises over the last few years, and with house prices getting a bit ridiculous lots of people are paying more than they can afford. It also means that loans will probably get cheaper, so things might get rosier for those with good credit histories who are likely to avoid the worst of the Credit Crunch. Alliance and Leicester offer some pretty cheap loans, so I'll be keeping my eyes open if their prices go down further over the next couple of months.

Despite the Credit Crunch, it's seeming as though Britain's debt mountain is continuing to grow. I've seen that personal debt in the UK has soared to £1.3 trillion recently, which seems pretty big in a nation of around 60 million inhabitants. In fact, it's £21,666.66 per person, including children! Over 80% of the debt is accounted for by mortgages, which is understandable seeing as property prices actually make me feel quite ill. If you thought house prices in the US were high before all the subprime issues, then you should check them out here. Most lenders say that the average residential property price in the UK sits at about £200,000, that's near enough $400,000 at the moment!

The crazy house prices mean that most people have to borrow eight to ten times their annual salary to make a house purchase, and banks have continued to dish out the mortgages - although the country is seeing something of a slowdown. I read a paper from PwC, the big accountancy firm, that predicts that there will be record numbers of insolvencies in the country this year. Not many people seem to think it will be anywhere near as bad as the subprime crisis back home, but things are definitely going to get a little sticky. For starters, 1.4 million people will be coming off their low fixed rate mortgages later in the year and their monthly outgoings will rise by an average of £140 unless they refinance. For people who are already on the fine line when it comes to making ends meet, it seems likely that this will tip them over the edge.

This weekend I saw that the internet bank Egg decided to cancel the credit cards of 161,000 of its customers. That seems like a pretty big number to me, and it comes at a time when everyone is banging on about the credit crunch. However, according to the bank, the move actually has nothing to do with the credit crunch. Instead, it came after a one off review of the company’s credit book after it was acquired by the Citigroup last year. With this assessment, Egg claims that it no longer wants to lend to people who carry an ‘unacceptably high level of risk’, so it’s told 7% of its customers that they will no longer be able to borrow on their cards in 35 days time.

However, it appears that’s not the full story. Disgruntled customers contacted the BBC website and expressed their anger at having their credit withdrawn, and it turns out that many were not high risk. In fact, some customers had gleaming credit histories, and frequently paid off the whole balance of their card. One Trevor Smith, of Nottingham, complained, ‘Egg may be cancelling high-risk customers, but they are also apparently ditching those, like me, who pay no interest because we are good creditors! It’s disgusting that they are making its just the bad ones who are being dropped.’

It doesn’t look pretty, and it’s pretty bad PR on the part of Egg, but (regrettably) I don’t think many people can do too much about it. Banks in the UK can effectively choose whenever they please if they don’t want to lend to people, whether you’re high risk or you’re just not making them enough money, which seems to be the case here.

Personally, I’m not really bothered by all of this, because I don’t use Egg. As a keen traveler, I think American Express credit cards have the most benefits. Somehow, I bluffed on my credit card application and got Platinum card a while ago (but I earn just enough money to qualify now). It’s pretty good because it arranges currency exchange on your card, and guarantees that you won’t find a better deal on the high street. I do pay it off all the time though; I’m just hoping this doesn’t get my card withdrawn!