Personal debt in the UK rises above £1 trillion

1st August 2007

The amount of money owed by consumers has broken through the symbolic £1 trillion barrier for the first time.

The Bank of England (BoE) has said that consumers owe more than £1,000bn on cards, mortgages and loans.

According to the BoE, about 80% of UK personal debt is in the form of loans secured against homes, such as mortgages and re-mortgages.

Debt experts are warning consumers to think long and hard about how to manage their debts as interest rates rise. Informal debt management is becoming more popular as consumers realise the risk posed by consolidation loans.

After taking on an extra £11.23bn of debt in June, consumers now owe £1.004 trillion or £1,004,290,000,000.

Citizens Advice has seen an increase of 44% of people seeking help for debt problems over the past six years.

"We have been warning for some time now that personal debt problems threaten to overwhelm large numbers of people in this country, with potentially devastating consequences," said Teresa Perchard of Citizens Advice.

Around six million families are already struggling to keep up with their debt repayments, according to the National Consumer Council (NCC).

The BoE has raised interest rates four times since November, taking the base rate to 4.5%.

The BoE's rate-setting committee meets next week to decide whether to lift rates again.

The rate setters want to restrain inflation, as well as galloping house prices, consumer spending and debt levels.

At the same time, they need to avoid causing a downturn in growth and manufacturing, or triggering a sudden slide in property prices or consumer demand.

But another set of robust lending figures, combined with upbeat housing market data from Nationwide building society, also released today, may force the bank to act again in August and add another quarter point to the cost of borrowing.

Some debt advice groups have said further interest rate rises could force heavily indebted consumers into deep trouble, especially as most debt owed is secured against properties.

The Bank of England's chief economist Charles Bean yesterday played down concern about growing debt.

The £1 trillion figure, he said, did not mean UK households were sitting on a "time-bomb", since an increase in borrowing had been matched by an increase in financial assets.

Hilary Cook, investment strategy director at Barclays Stockbrokers, agreed with Mr Bean's comments.

She said the £1 trillion landmark was wasn't as "scary" as it looked, because the value of people's assets have risen by around 60% in real terms during the last nine years.

"We are borrowing against assets which have gone up massively, interest rates are still relatively low and we all have jobs," she said.

But workers on the debt frontline remain worried about the personal cost of taking on too much debt.

"Interest rates are still at a historically low level and people seem to be managing their repayments," Malcolm Hurlston, founder of debt charity the Consumer Credit Counselling Service told BBC News Online.

"But there are now a trillion reasons why consumers need to stop and think if they can afford their debt burden, particularly if interest rates go up."

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