Consumer pain looms with continued credit hikes

Millions of people are set for their biggest ever financial distresses in the new year as the squeeze on money markets hits households across the UK.

City analysts are warning that the last two weeks of November were the worst on record in the credit market as UK banks refused to lend each other money. Experts predict that this anxiety will be passed on to consumers during December in the form of steep rises in borrowing charges.

Shoppers will spend a record £12 billion on their credit cards this Christmas and Peter Hahn, a former managing director at Citigroup, said loans were likely to incur the higher charges as UK banks seek to protect profits.

“Banks will be more capital-conscious and very wary of risk,” he said. “If you are a borrower, you will pay higher rates.”

These fresh warnings were sparked by a $10 billion writedown at UBS, the Swiss investment bank, which most experts believed had already revealed the extent of its losses.

Problems in the square-mile will leave thousands of junior bankers with no bonus this Christmas. A number of banks are freezing recrutiment and culls of jobs related to the credit markets are expected at the worst-hit banks.

The recent financial uncertainties have also damaged Governments reputation for managing the economy. A poll for The Times today shows that confidence in the Labour’s economic competence has dropped by almost a third since September.
The Populus poll recorded a near 16-point drop, close to 35 per cent, in the number of people naming Labour as the best stewards of Britain’s economy in bad times as well as good. At the same time, the Tories’ rating on the economy has risen by nearly six points to 34 per cent.

Such sharp changes are worrying for PM Gordon Brown since economic management has been central to both his personal reputation and to Labour’s electoral success over the past 10 years.

Plus rising credit card rates will add pressure to over-stretched UK households struggling to cope with increased mortgage payments and higher utility bills. British consumers have amassed a total credit debt of close to £60 billion, according to PricewaterhouseCoopers.

In addition to increasing interest rates, a growing number of UK banks are turning down credit-card applications in an effort to reduce their exposure to debt. Last year around 31 per cent of applications were rejected. Now, banks reject between 42 and 51 per cent of applications.

This will cause problems for the many credit borrowers who move their debt from one cheap short-term credit card deal to another.

Mark Dampier, of Hargreaves Lansdown, the independent financial adviser, said: “For the first time in a long while consumers are going to get a real shock. Thirty years ago you had to queue for a mortgage. But, in the last 15 years, you have been able to snap your fingers and get credit. That is all going to change.”

There are fears that the credit crunch will have a devastating effect on families which are already deep in debt.