Household debt & bank rip-offs

To its credit, the mainstream media has covered this issue, although the focus has been largely on the greed of the consumer, and less on causes such as widespread poverty and irresponsible banks. The article was written by Media Hell's Brian Dean, and originally published in the Idler issue 36, Winter 2005.

Average household debt in the UK is approximately £7,600, and rising [2005 figure]. That's excluding mortgages. Contrary to press reports, it's not all about rampant consumer greed…

• 20% of people use loans and credit to survive until pay-day, according to Credit Action.
• 24% of people go into debt to cover basic living costs, according to a YouGov survey.
• One in five households are in debt to water companies, according to the National Consumer Council (NCC).
• One in seven households can't afford their energy bills. (NCC)
• One in twenty households have had their phone cut off. (NCC)
• Those struggling with debt typically earn less than £9,500 a year, according to a MORI survey.
• The current rise in debt hasn't been accompanied by a consumption boom, according to the Bank of England Quarterly Bulletin.
• Personal debt has grown twice as fast as income since 1997. On average, personal debt has increased by 50%, while incomes have risen by 23%.

The rise in debt can be seen against a background of appallingly low incomes. In real terms (ie allowing for inflation) the bottom 10% of jobs pay less now than in 1970. The minimum wage would have to be around £6.50 per hour to bring low-pay up to the 1970 level. Meanwhile, people receiving Jobseekers Allowance must survive on only £56.20 a week.

The widespread financial desperation indicated above shouldn't obscure the fact that national wealth is increasing – GDP has doubled since the early 1970s. You might ask where all the wealth is going. Which leads us to the next section…

Bank rip-offs

Banks and credit companies see household debt as an "opportunity". Huge profits can be made from ripping-off the financially desperate. Here are some typical rip-off scenarios:

• Late payment fees. If you pay your credit card bill late, you'll automatically be charged a fee of around £20. Credit card companies make £400 million a year from such charges, according to the Consumer Association. The Office of Fair Trading believes this breaches consumer law (which stipulates that penalty charges must reflect only the bank costs incurred). But it's difficult to prove, as banks are secretive about how charges are calculated.

According to a front-page Times report on credit card rip-offs (27/10/04), the banks' willingness to waive card penalty fees as a "goodwill gesture" and their failure to prosecute people who refuse to pay the charges are evidence that the fees are unjustifiable. The Times quotes a legal expert: "Credit card penalty charges are legally unenforceable because they seek to punish the borrower rather than compensate the bank for any losses that they have suffered".

• Other bank charges. Unauthorised overdraft fees, returned cheque fees, unpaid standing order fees, various "administration" fees, etc. Which? magazine found that one in four people exceeded their overdraft limit in the past year – it claims this is "a real moneyspinner for the banks". The average "mortgage arrangement fee" now stands at around £500 – nearly double what it was five years ago.

• Credit card cheques. Some credit card companies mail these specifically to customers experiencing financial difficulty. Can't pay your water bill? Why not use our cheques? They look like normal cheques – seemingly harmless, except for the high interest rate revealed in the small print. A Consumer Association survey found that the higher a customer's debt, the more likely they are to be sent credit card cheques.

• False advertising. According to the Office of Fair Trading, one in five credit card advertisements breaks the law. The breaches mostly relate to misleading claims about interest rates.

• Sub-prime lending. One in five people are denied access to mainstream credit and have to borrow in the more expensive "sub-prime" market, at rates that average 177%. This is "loan shark" territory, but it's a lucrative enough market (worth an estimated £16 billion a year) to attract big corporations.

• Payment protection insurance (PPI). This is insurance which supposedly covers customers unable to keep up credit card repayments, etc – it's generally taken up by the most financially vulnerable people. Banks use PPI as a 'cash cow', with huge profit margins which are not transparent to customers. For example, the Guardian newspaper claimed that 10% of Barclays' worldwide profits have come from selling PPI.

The Guardian also alleged that Barclays sponsored a secretive public relations operation called 'Protect' to rebut claims of excessive profiteering on PPI. In an article entitled 'Barclays exposed over huge insurance rip-off', the newspaper quotes the reaction of Norman Lamb (MP and Treasury select committee member) to its PPI findings: "It is gross profiteering, absolutely excessive, and deserves to be exposed. People need to be aware of this rip-off".

How to claim back your money

BBC2's Money Programme (12/12/06) investigated the banks' scam of illegally charging "unauthorised overdraft" fees, etc, and revealed the following:

You can claim back all the penalty fees you've been charged over the past six years (the legal maximum period for reclaiming). You can also charge your bank interest on this. They may object at first, or offer only a partial refund, but eventually they will cave in, because:

• Under the "Unfair Terms in Consumer Contracts Regulations (1999)" penalty charges have to reflect administrative costs – profiting from them isn't allowed. The banks make an estimated £4.5 billion in profit from such charges each year.

• Penalty charges are often £30 or higher, but the cost of processing overdrafts, bounced cheques, etc, is estimated at between £2.50 and £4.50, depending on the amount of manual intervention. In 80% of cases there is no manual intervention.

Although your bank may initially threaten to defend itself in court against your refund claim, no bank has done so to date. This is because they know they have little chance of winning, and they are petrified of bad publicity. In practice, people determined to be refunded have been fully refunded (in some cases by thousands of pounds).

More details:
BBC's coverage >
Reclaiming your money >

Debt misery

• It takes an average earner 40 days just to pay off the £2,400 interest on the average level of credit card and loan debt. February 10th (the 41st day of 2005) has thus been dubbed 'Debt Freedom Day'.
• 15% of people say their debts are spiralling out of control or keeping them awake at night, according to a YouGov survey.
• Citizens Advice Bureau advisors have dealt with a 47% increase in personal debt problems over the last five years.
• A quarter of those in debt are receiving treatment for stress, depression and anxiety from their GP, according to the Citizens Advice Bureau.
• 1.4 million customers on electricity or gas pre-payment meters have disconnected themselves for fear of running up debt.
• Bankruptcies increased by 30% last year, and by nearly 30% the previous year, according to the DTI.
• The biggest cause of rows within a relationship is not infidelity but money, according to Relate.
• The amount of debt being chased by Britain's bailiffs has soared by 70% over the past two years.
• Sainsbury's Bank predicts that 30% of personal loans taken out this year will be for "debt consolidation" (ie paying off other outstanding debts).

(Sources, respectively: creditaction.org.uk; YouGov/KPMG survey, quoted by Press Association, 2 Sept 2003; National Consumer Council report, Sept 2003; MORI survey, quoted by Money Observer, 2 June 2005; Bank of England Quarterly Bulletin, Autumn 2004; creditaction.org.uk; Guardian, 14 Jun 2002; IFA promotion; YouGov/KPMG survey, as above; Fuel Poverty Task Force, June 2001; creditaction.org.uk; Consumer Association estimate quoted by Daily Mirror, 17 Oct 2003; The Times, 27 Oct 2004; Which? magazine quoted by the Guardian, 23 Oct 2004; OFT report, March 2004; Datamonitor, UK Non-standard and sub-prime lending 2004; Guardian investigation on PPI, 6 March 2004)