UK banks write off billions in unpaid credit card debt

UK banks have taken a serious hit on credit card debt. With sky high levels of personal debt, people are finding it impossible to pay down the plastic.

Just take a look at how that nasty red line in the chart above takes off. In the last three months of last year, banks wrote off ₤750 million, or around 3.7 percent of the stock of outstanding credit card debt debt. In the last three years, the banks wrote off credit card debts amounting to over ₤6.6 billion. Over the last ten years, the credit card write-offs have increased by a staggering 2,000 percent.

Understandably, these huge losses have forced the banks to take a more cautious approach. The stock of credit card debt has actually fallen over the last two years. However, mortgage equity withdrawal has actually increased.

If credit card debt is falling, what is fueling the UK's consumption boom? The banks now reckon that there is nothing safer than real estate. Mortgage equity loans are the current fad. In the last three years, UK home owners withdrew ₤86 billion of wealth from their homes, mostly through credit. That is over 4 times the total stock of credit card debt. The banks are happy to go along with this spendfest because the UK housing market is steaming ahead at double digit growth rates.

So what happens if housing prices start to fall? Something very nasty. Many people could easily find themselves owing more than the value of their homes. If homeowners get into payments difficulties, then the banks might find it difficult to recover the combined value of outstanding mortgages and home equity loans. Those credit card losses could easily be dwarfed by even higher write-offs from defaulted homeowner debts.