In the last few days, hundreds of thousands of people have gathered in Paris for a three-day protest demanding to end the damaging effects of low interest credit card debt. The protest also took place today as thousands of anti-credit card protesters flooded Mainstreet, the square in front of the Louvre in France, as well as in Caracas and other international palaces.
The anti-credit card protesters were joined with the IMF, civil society, leading consumer groups and the World Bank – whom many in the crowd have called cowards. These groups, including the World Bank, are under intense pressure from outside governments and the ruling class to respond. The IMF has already called on member countries to pull their credit card users out of their homes by the end of the month. Consumers in Macedonia, Macedonia Sub-Saharan Africa, South America and many sub-Saharan Asian countries are being targeted by cash-strapped banks and financial services companies. Unemployment is soaring among many low-income individuals, with many saying that they are being denied basic services and paying large loan rates.
The Bank of England’s own Economic Outlook published last week shows real household debt spiralling into record levels. With household debt at an all-time high of over �10,000, and household credit card debts soaring through the roof, the size of the economy continues to shrink. As a result, the debt burden among the population is already too much to handle. Between 1970 and 1980, the number of people in debt doubled at a rate unseen in 20 years.
In the same period, real disposable income grew by a staggering 80 per cent. This transformation in the lives of working people and the rising cost of living has brought suffering and hardship to almost two million people. Many more will soon face a life or death crisis.
There are solutions to addressing the mounting debt crisis which are gaining some attention. But the basic approach must be one of immediate and decisive action to get the debt under control.
The most obvious solution would be a major debt restructuring. Clearing up debts would mean cutting back vital spending. The first step is to make the debtor pay off the debt, and this involves repaying the original creditor. Banks and other financial services companies must then pay off the total debt as a percentage of their total assets.
The IMF has long recognised that the repayment of debt must be determined by the debtor’s level of income. The figure of 44 per cent is the lowest in the EIA analysis used in this paper. Clearing up debts would involve raising the standard of living of the debtor by nearly 50 per cent. The resulting minimum payment would be a two-thirds cut in the monthly cost of living, with the figure rising to between 20 and 35 per cent.
The next step is to create a radical new type of low interest rate credit card. This is not an easy task. Although it is easy to provide a credit card with a pay-off rate of 0.5 per cent, many credit card issuers are seeking other things than such a rate. Recent moves by some of these credit card issuers to raise or decrease the rates of their low interest rates, have been disastrous. There is every reason to be suspicious of any radical plans to radically slash rates of rate of interest. However, many of these customers have already shown their willingness to work with the bank to raise their rates, and cutting rates are therefore all that is left.
Another option is to set up a new credit card company. Many credit card companies are increasingly becoming increasingly desperate about retaining business within their own industry and look set to raise rates to some extent. Some of these banks may indeed be seeking to re-establish their business within industry while concentrating on re-establishing themselves within the general public. But these companies will need to demonstrate how they can deal with the demands of their clients and the mounting pressure of the medium to long term customer.
All of these steps make it increasingly unlikely that the Bank of England will simply cut the rates of their low interest credit card accounts. It is the banks themselves who are the main beneficiaries of all these radical measures. We cannot be optimistic that the Bank of UK will use the power it has to its nose, dry clean this sector and roll it into the dustbin of history.
In the meantime, it is time to take a moment and think about what it’s all going to cost us – a good low interest rate credit card of some sort? Can you afford it or not?
Tommy Fisher is the former managing director of the Retail and Consumer Credit Union. Follow him on Twitter @TommyFisherME .
This article was amended on 18 Apr 2002. An earlier version stated that low interest credit cards reduced the repayment of debt by more than half. This has now been amended to reflect that a reduction in the rate of interest is not necessarily the case.