Over 3.5 billion’s worth of debt written off in 2011 Britain. Findings show figure rests at 7% of all outstanding debt.
It has emerged from the BBC that British credit card companies wrote off a staggering 7% of all outstanding credit card debts in 2011. This is actually a decrease however from those relating to the years before; showing us both, how bad credit card debt credit card debt has been since the recession in 2008, and that the situation is to some extent, improving. So, is 2011’s decrease in credit card debt a sign of an improved economy, or merely evidence of the bank tightening their purse strings and lending to less people; as a result of the incredibly high unrecoverable debt sums of preceding years?
The actual figure rests at 3.6 billion. This, to the credit of the UK economy is a dramatic fall from 2010’s figure of £5.32 billion; the peak amount since the recession. 2009’s amount was 4.12 billion. To put all of this into context, before the banking crisis, credit card write off’s reached approximately £3 billion. Thus, 2011’s results indicate a fact a step in the right direction, and a return to the days of financial stability. To make such an assessment on a whim is a dangerous move however, with a few important factors needing to be taken into consideration beforehand.
Lending Has Decreased
The economy has recently been stale, which is no news at all. Banks have been forced to cut down on lending since the start of the recession. That lending remains so tight is indicative of the lack of trust bankers still have in the financial system. Whether this pessimism is justified is a different debate all together; however I find it hard to imagine an economy thriving under limited bank lending. Rigidness in the distribution of wealth quite simply results in a lack of market fluidity; and vice versa. This is not to say that the banks should go all out in lending, as such practices got us into this mess in the first place, however, the purse strings should be loosened somewhat in order to generate commerce. An often overlooked factor when analysing why credit card debt rates have been so high:
Credit Card Interest Rates Have Risen
Interest rates are the highest it has been in ten years, with the average sum amounting to 17.3%. Some rather unfortunate customers are even charged up to an incredible 30%. The fact that debt write offs have hit such high figures, might just in some part be down to the large increase in interest rates. Such a view, is rather simplistic, and cannot be taken as the most significant factor behind the BBC’s findings. Although, one cannot overlook high interest rates playing a part in the rise of debt sums.
Is the 2010 to 2011 decrease in debt write offs a good omen?
One would be foolish to assume, simply based on the debt figures of this year in correlation to those preceding that the economy has likewise improved. That isn’t to say the economy hasn’t gotten better to some extent, however these debt figures do not necessarily show that. It could – and I stress the word ‘could’ – all be a mirage, covered by the fact that banks have cut down significantly on lending.