Doubling in credit card bad debt

UK economy

There is concern that the UK economy, which had shown signs of recovery, could be in recession for the long-haul after banks acknowledged that the money owed by defaulting borrowers is likely to never be repaid.

The concern comes as reports regarding a huge rise in the amount of money banks are writing off as bad debts on their credit cards comes to light.

According to the BBC, official figures from the Bank of England show that the total value of such write-offs doubled to GBP£1.6 billion in the third quarter of 2009 - this comes after two consecutive quarters which put the write-offs at about GBP£800 million respectively.

Impact

Analysts believe the figures reflect the impact of the recession and are ultimately an acknowledgement by UK financial services that the money will never be repaid: essentially putting the economy in another risky situation.

However, according to David Black of financial consultancy Defaqto, "Banks have been much more cautious about who they lend to over the last four years.

"HSBC, NatWest and RBS will only offer new credit cards or unsecured loans to their current account customers," he added. "Banks also want to sweep bad news into one year's accounts to make future years look better."

Yet, given that considerably large sums of cash - much larger than these losses - are set aside each year by banks and other lenders to cover potential losses on services such as credit cards and personal loans, the figures are somewhat daunting.

What's more, given that the money is only written off after a loss is officially defined as "unrecoverable", these figures seemingly go a long way in helping to explain why interest rates are so much higher on credit cards, and other forms of unsecured loans, than on mortgages which are secured on borrowers' property.

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