Debt: The Good, the Bad, and the Ugly

So here’s the scenario:

You’ve been thinking about buying a home for some time now Your savings account is modest, but there’s enough there for a small down payment. You’re waiting for the perfect opportunity to buy your dream home.

Pretty soon, all your friends have bought beautiful, big new homes. They talk at dinner parties about how great their mortgages are and how their monthly payments are less than what you pay for rent. You decide that now’s the ideal time to take the plunge.

You find a lovely house in a reputable suburb at a price a little bit higher than you expected to pay. When you work out the details with your mortgage broker, you are happy to discover that the monthly payments are affordable. You dive in with both feet. You pay the lawyer, the closing costs, get insurance, and start packing.


When you move in, you discover that you don’t have quite as much furniture as you thought you did, so you head to the department stores for a new living room suite, a couple of upgraded appliances, and some accessories that really tie the place together. At the cash register, you whip out your plastic and charge the purchases, knowing well that you can afford to pay the bill off in a few months.

A month later, your car breaks down–you charge the repair bills. The next week and the week after that, you have friends visiting, and you go out for dinner a few times–and the tab is paid by plastic. The dog cuts his paw… the kids outgrow their clothes… you want to take a long weekend in the country with your spouse–charge it, charge it, CHARGE IT!

A year soon passes. Your monthly payments are starting to creep up, and your new life in your new home is beginning to seem like something out of a bad movie. First you miss a payment… then you juggle one payment by taking an advance from one of your credit cards… then the creditors start calling…

You think this can’t happen to you? Yeah, that’s what a lot of people in the UK thought, too.

Take a look at these numbers to see the current reality for the Brits:

— Consumer borrowing has climbed to over £1 trillion in the last five years — Credit arrears have grown in the UK, forcing the Royal Bank of Scotland (RBS) and Barclays (Britain’s biggest banks) to step up provisions against bad debt — Personal bankruptcies in the UK have increased by 28% in the past year

What do the banks have to say?

In yesterday’s report from RBS, which revealed that credit arrears have been climbing, company executives stressed that the level of bad debts were “within normal parameters.”

RBS CEO Fred Goodwin said the following: “In the last few years, we have seen record levels of good credit quality… it’s not a great surprise that [interest rate hikes] have now put a few people under pressure… There’s nothing to make us wish we had not done the business in the first place.”

In response, Credit Suisse First Boston Analyst Michael Lever said the news was “both comforting and reassuring.”

Can someone please explain to me what’s comforting and reassuring about the fact that UK consumer debt is so high that personal bankruptcies have increased over 25% in one year?

Sure, the bank’s bottom line has grown, but it’s pretty clear that the talking heads don’t care at all about all the individuals behind the bad debt. When I read that the rate of credit arrears has grown, I can’t help but think, what about all the people in the UK who are now sitting in their overpriced homes surrounded by unpaid bills, with little food in their cupboards to feed their families?

While RBS has no regrets about approving the loans that have resulted in credit arrears, I have to wonder whether UK consumers now “wish [they] had not done the business in the first place.” I also question how many Brits are comforted and reassured by the fact that the banks are making big bucks off their debt problems.

My guess? Not many.