Credit card crisis could prove costly.

Recent Department of Trade figures show the number of personal insolvencies rose by 2% last quarter.

Although at first sight a small rise like this does not seem so alarming, the fact that the second quarter of 2002 showed a 13% increase and that personal insolvencies have been rising for five quarters running, paints a gloomy picture.

According to R3, the Association of Business Recovery Professionals six out of 10 individuals went bankrupt because of consumer debt and warned their rise could damage the wider economy because of its reliance on consumer credit. R3 spokesman Chris Laughton says the amount of credit card debt will lead to a number of people getting on credit black lists.

He says: ‘This would make the consumer market go the opposite way – there would no longer be readily available consumer credit. The credit squeeze would in turn affect spending and this is what’s powering the economy.’

Philip Sykes, head of business recovery at Moore Stephens says he has seen many people coming to the firm with problems stemming from credit card debt.

‘A significant amount of debt is on highly used credit cards, where people run their cards up to their limit and then pay off the minimum charge every month,’ he said. ‘They then get a consolidating loan and run up more credit and more debt.’

People’s indebtedness in turn creates a potential problem for the economy as a whole because any rise in interest rates or unemployment increases the number of people who cannot pay off their credit cards and as a result, become insolvent.

‘If levels of unemployment rise or there is a rise in interest rates, there will be more bankruptcies and there will be a slowdown in consumer spending,’ he says.

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