The history of plastic cards in Britain is interesting. Barclaycard’s 1966 launch was preceded in the UK by Diners Club, in 1962, and American Express, in 1963. Both were charge cards — you have to pay off the amount in full at the end of the month — rather than credit cards.
Barclaycard, launched in an era of belt-tightening and sterling crises, did not have a huge initial impact, although it claimed 1m cardholders and a network of 30,000 retailers at the time of the launch. The other banks took until 1972 to follow with their joint venture, the Access card, but it took years before credit cards reached out to the population as a whole, being long regarded as the preserve of Cortina-driving executives with drip-dry shirts and expense accounts.
A few days ago I was sitting next to Lord Howe, who as Sir Geoffrey Howe was chancellor of the exchequer from 1979 to 1983. We reminisced about some of the changes he introduced, including the liberalisation of credit. Until 1982 credit for most consumers meant hire purchase, essentially a loan from the store, and there were strict rules governing how much could be borrowed. His abolition of hire-purchase controls in that year, together with other liberalising measures during his time in office, changed the credit climate irreversibly.
Today, of course, plastic cards are ubiquitous. There are 70m credit cards (11m of them Barclaycards), 67m debit cards (a later innovation) and just under 5m charge cards in use in Britain. That does not mean everybody has one — the average credit-card user, for example, has more than two. Take-up of credit cards in Britain is 63% of the adult population, higher than in most European countries but lower than the 80% in America.
As one who regularly snorts with impatience when waiting in a queue behind somebody making a ridiculously small purchase with a credit card, I was surprised to discover it was only as recently as 2004 when plastic (credit, debit and charge cards) overtook cash as the main form of payment.
What has been the effect of easy access to credit cards? Many people worry that as a nation we are wallowing dangerously in a lake of debt and that it won’t take much — perhaps an interest-rate hike or two — to push us under. As an aside, last week’s MPC (monetary policy committee) minutes did not suggest this is going to happen soon, although credit-card interest rates, including Barclaycard’s, have been rising.
The Consumer Credit Counselling Service said last week that the number of people in “extreme debt” had doubled over the past year. It dealt with 280,000 clients last year, and found that the biggest problems were not among the young but the middle-aged, 40 to 59-year-olds. The Citizens Advice Bureau says it helps more than 1m people a year who are struggling with debt problems. Personal bankruptcies have been rising sharply, although partly because of changes in the law.
One of the most difficult things to get across is that you can have a situation where many people are struggling with debt, but it is not a macroeconomic problem. Mervyn King, governor of the Bank of England, tried to square the circle recently by describing the number of people getting into difficulty over debt as “a potentially large social problem”. The question, perhaps, is how far such a problem has to go before doing some economic damage.
The Bank’s latest survey, carried out with NMG Research, was published last month. It showed that two-fifths of households were debt-free, 43% had mortgages, and 41% had unsecured debt (some, of course, have both). The vast majority of households have more assets than debt. About one in 10 households with unsecured debts found them to be a heavy burden. The proportion has not changed much over the past decade.
The number struggling with their mortgages, about 7% of those with home loans, has risen over the past three years but is still lower than it was for most of the 1990s.
For those who are concerned about debt, credit cards offer the easiest access to it but it would be misleading to blame them for household indebtedness. Britons owe £1,191 billion, equivalent to more than 95% of the UK’s gross domestic product, but £999 billion of that is accounted for by mortgages. Of the remaining £192 billion of consumer credit, £56 billion — less than 5% — is owed on credit cards.
This is as it should be. Given the rates of interest charged on credit cards, nobody should borrow on them for any length of time — as Matt Barrett, Barclays’ former head, once famously pointed out. And, while mortgage lending is up by 11% on a year ago, the growth of consumer credit has slowed to 7%.
Credit cards, meanwhile, are undoubtedly of benefit to the economy. A report on the credit-card industry by Economy.com, an economic consultancy, found its contribution to employment was 111,000 jobs, and to the exchequer more than £8 billion of taxes each year.
Credit cards save £5.5 billion a year over paper-based payment systems, and have saved consumers more than £12 billion annually in interest (the interest-free period between transaction and payment). Cards allow people to smooth out their payments.
“Even taking debt into account, credit cards have been of significant net benefit,” said Paul Guest, the report’s author. Perhaps the easiest way of thinking about this is to imagine life without credit cards. Internet businesses would struggle, as would many others. The effect of getting rid of credit cards would be to cut GDP by £22 billion over three years, mainly by reducing consumer spending, it found.
Some would say that would be no bad thing. But spending is the economy’s lifeblood. Credit cards help to keep it flowing.
PS: Not everybody will know of Toshihiko Fukui but they should note the name. The Bank of Japan governor is caught up in a scandal over his investments in the Murakami Fund, whose founder, Yoshiaki Murakami, was arrested this month for insider trading. Fukui’s defence is that he sold up in February, although he might have known then the authorities were preparing to move against Murakami. The governor has shed public tears and offered to take a pay cut.
Of rather more interest outside Japan is what Fukui (if he survives) and his colleagues might do to interest rates. Japan has had zero interest rates since 1999, apart from a short break during late 2000 and early 2001. The policy finally paid dividends with economic growth of nearly 3% last year and, more significantly, the recent end of the long period of deflation, or falling prices.
The zero-interest-rate policy, however, is set to end. Fukui said last week that policy would be “proactive”, which some interpreted as an end to zero interest rates as early as next month. Others are not so sure.
Grant Lewis, a Daiwa Securities economist, thinks the Bank of Japan will delay until the autumn, and the end of prime minister Junichiro Koizumi’s term in office. But he thinks when rates rise, they will eventually do so significantly, ending up at 3%. That really would be the end of the cheap-money era.
