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Angela Watkinson (Upminster) (Con):
This will be a largely consensual debate, because each and every one of us has had constituency cases through which we have become familiar with the suffering that unmanageable debt can cause. I welcome the new legislation, which is aimed at providing a fair deal for customers. It is necessary because household debt broke through the £1 trillion barrier in July last year and is predicted to rise to £1.1 trillion this year. It took 600 years of banking history for household debt to reach £0.5 trillion, and it has doubled, while the savings ratio has halved, since 1997. Interestingly, in an intervention in the speech by the right hon. Member for Dumbarton (Mr. McFall), the Minister said that household wealth had doubled in that time, and that illustrates the declining propensity to save.
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As many as one in 20 households now pay up to a quarter of their income in consumer credit repayments. Many families and individuals have combined mortgage and credit card debt that will become unmanageable if interest rates rise againthere were five increases last year. People who overstretch themselves leave no margin for an increase in repayments and are heading for trouble. Recoveries by bailiffs are increasing dramatically, and debt advice centres are facing unprecedented demands for help. Behind each of those examples are stories of misery for the families involved.
Greater transparency and simplicity is needed in the consumer credit and loans industry, but it is important that our new measures have a positive impact on business as well as benefiting borrowers. I shall concentrate my remarks on the changing social attitudes to debt. The explanatory notes attached to the Bill refer to the Consumer Credit Act 1974 and the term "hire purchase". We do not hear that much these days, but I recall when it was first introduced. It was talked of in shocked whispers. The word "hire" in that phrase illustrates the attitude to credit then, as it implied that people did not own the item that they had borrowed money on until they had made the last repayment. Until then, it was only on hire and still belonged to the company that had provided the loan.
Attitudes have changed completely over the years. It is now regarded as smart to use other people's money, especially when it comes to credit cards. We have heard several hon. Members describe how interest payments can be avoided by changing debts from one credit card company to another. Cash has also become much less popular. Money-back guarantees on faulty purchases are also attached to credit cards, which make them attractive. Many people have multiple cards. There was only one type in 1971, and now more than 1,300 are available. The companies vie for customers by making the terms and conditions seem more and more attractive.
Store cards often offer 10 per cent. off as an incentive, but the issuing procedures for store cards are especially casual. Some constituents of mine moved house to a new area, and six months later, applied for credit to buy a new car. To their astonishment, they found that their credit rating was not good, even though they did not owe any other money. The people who had moved into my constituents' old house had picked up some junk mail with their names on and used it to apply for a range of store cards, run up debts on all of them and failed to pay. The assessment procedures for those store cards must have been very lax. Stores should be more circumspect when issuing cards, to ensure that they are issuing them to the right people.
Some stores must have had bad experiences. I recently went to buy a small item of furniture and the store staff started to ask me for all sorts of information. I said that I did not want credit, nor did I want the item delivered, because it would fit in my car. However, they still wanted to know my name and address, how old I was and what I had for breakfast! I was not willing to give that information, so they lost a sale. However, that situation might have arisen because the store had had experience of bad customers.
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People buy on credit what they cannot afford. They often buy poor-quality goods to minimise the size of the loan. The goods do not last, and often do not outlive the term of the loan. People remain in debt, with nothing to show for it. I often wonder about the frequent television advertisements for sofas with nothing to pay for five years. Anyone with several young children will know what a sofa looks like after five years. People must be in perpetual debt, because at the end of the five years they will need another new sofa.
It is also popular to add the cost of a holiday or a new car to a mortgage. Have now, pay later. But people pay much more when they pay later. I welcome allowing customers the right to challenge unfair lending practices, and improving the regulation of consumer credit businesses through measures to drive out rogue money lenders who charge extortionate rates of interest.
Every now and again, I receive a batch of letters from secondary school pupils in my constituency, arising from their citizenship lessons. In the main, they are full of idealistic notions. Sometimes the pupils want to know what I think, but more often they want to tell me what they think about how the world can be put to rights and how everything can be improved. They have some good ideasif only money were unlimitedbut they obviously have no idea at all about money or the economy, about where money comes from and how it circulates. I endorse the comments of my hon. Friend the Member for Eddisbury (Mr. O'Brien) on the establishment of links between banks and building societies and the teaching of citizenship in schools, so that students can learn that everything has to be paid for, and that everything comes originally from taxation in one form or another.
People need not just to know but to understand the total cost of a loan over the whole repayment periodnot simply the purchase pricebecause it may not be the bargain that they thought. They need to know the cash price, plus interest, plus any default charges. If all that information is available, they can take full responsibility for their decision. They need continuous information on the progress of their loan payments. That is in the best interests not only of the borrower but of the lender. We must not ignore the rights of lenders. They are sometimes the victims of bad payers and have to write off those debts. Such information would prevent debt escalation, increase the likelihood of payment and take into consideration unforeseen circumstances, such as redundancy, illness or accident. Lenders need to distinguish between people who cannot pay and people who will not pay, and to make arrangements for those who want to pay but are in temporary difficulties. They could either increase the term of the loan or reduce the payments.
Debt counselling is a growth industry, as several Members have said. Important as it is, none the less it is shutting the gate after the horse has bolted. As important as debt counselling is budget management advice. If that were available, it would help people to avoid debt in the first place. Such advice should include how to make the best use of a modest income and remain solvent, and how to deal with aggressive doorstep salesmen. I was pleased that the Minister said that that point was under consideration.
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Some people respond to newspaper adverts about goods that they think they might want, although the cost is never clear and there is an inquiry tick-box on the advert. An aggressive salesman calls and only the most resistant and robust customer will be able to get that man out of the door without having signed up to buy something, possibly at a cost that far exceeds what they would have paid elsewhere. People need to know how to assess whether a bargain really is a bargain, and how to calculate the full cost as opposed to the cash price.
Prevention is better than cure. Helping people to avoid debt in the first place is much easier than trying to resolve the problem afterwards. The Micawber principle still holds good. Borrowing up to one's repayment limit, with no cushion against the rainy day that always turns up when it is least convenient, is a risky way to live.
Over recent decades, things have changed dramatically. Waiting for something until one has saved up for it is no longer popular. People want things nowtodaywhether or not they can afford them. Somehow, they think that tomorrow will take care of itself. The result is that personal debt in Britain is increasing by £1 million every four minutes, as my hon. Friend the Member for Bexhill and Battle (Gregory Barker) pointed out. Unfortunately, for many people who are just managing to service their outstanding loans at current interest rates, another rise could just shift them into the unmanageable category, and the downward spiral of defaulting on payments and accelerating debt. I welcome the provision of more information, and information that is easier to understand, for borrowers.
I should like education at school and beyond to go much further, to promote real understanding of how money circulates in the economy between income, taxation, spending, borrowing and saving. For a healthy economy and a stable society, we need a balanced approach to consumer credit that gives lenders and borrowers a fair deal, and I wish the Bill fair weather in Committee.
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