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The Global Credit Card Crisis
Global credit card debt has quadrupled in the last decade. In boom times that may not necessarily be a problem, but the inevitable bust is upon us and now it’s time to pay the piper.
With personal bankruptcies up across the world, the reality of unsustainable debt is continuing to increase. And it’s hitting America hardest.
1. Who Are The Big Spenders?
America is a long way out in front when it comes to credit card spending with over 40% of the world’s spending. On top of that Americans average five credit cards per person and an average close to $6800 in personal debt per person.
Other countries are not far behind with Australia fast catching up with just under about $5700 in credit card debt per person. Britain, Ireland, Thailand and Korea have all seen massive credit card spending increases too. On the other hand, credit card spending in Japan remains low.
Here’s how the top 5 stack up:
1. USA ($6800 per person)
2. Australia ($5700 per person)
3. Canada ($5400 per person)
4. Britain ($4100 per person)
5. Ireland ($3100 per person)
The Crisis: Country by Country
Korea - When the South Korean government encouraged banks to offer credit cards to stimulate the economy in the late 90s, the corresponding blow out in debt resulted in the necessity of a huge government bailout.
Thailand - Between 2000 and 2005, credit card debt tripled in the country forcing the Thai government to impose strict standards on unethical practices by banks. Minimum salary requirements were introduced and 10% minimum repayments became a requirement so that individuals would not spiral into uncontrollable debt.
Mexico - Credit card use tripled between 2000 to 2005 and was considered a large factor as to why the default rate doubled in the same period. In Mexico, with a population of 109 million and an average annual wage of under $8000 per year, more than 6,500 new credit card applications are approved by the banks every day.
UK - The IMF recently warned that the UK would be facing a credit card debt crisis. With the largest number of credit card holders in Europe, it is expected that as much as $2.5 billion of consumer debt will not be repaid as the GFC worsens.
USA - With Americans holding almost $1 trillion in credit card debt and defaults expected to hit 10% by the end of 2009, it doesn’t take a genius to work out that this will have a massive impact on the bottom lines of lenders as well as the lives of American families.
China - With China’s emergence as a powerful economy and the gradual enrichment of the population, its citizens are already beginning to embrace credit. In 2002 the average credit card debt was around $600, but that figure is expected to balloon out to over $3000 by 2011.
2. Who are the beneficiaries?
With America accounting for over 40% of world credit card spending it is no big surprise that many American lenders are among the top beneficiaries of the world’s growing love affair with credit cards.
US Bank leads the charge with over $1 billion in profit last year and Capital One, Wells Fargo and Chase are not far behind. In Europe, Barclay’s Bank leads the charge due to Britain’s large share of credit card spending in Europe.
3. So What Can Be Done?
The sad fact is that people on an individual level have an often unhealthy love affair with credit. Instant gratification is a stronger driver for many people than responsible money management. Usually that can be left up to the individual, but when credit card debt starts hitting figures such as 9% of GDP as it did in Korea, it becomes a society wide problem.
Part of the problem is the predatory lending practices. For example the Thais only discovered that it was necessary to regulate their banks from offering credit cards to people who clearly couldn’t afford them when countless people filed for bankruptcy.
While the developed world is not at that point yet, it will take some serious self-reform by the main credit card companies to ensure that it is considered necessary in developed economies.
Whether or not they will heed that call, time will tell.
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