The Irish are the EU's second most indebted people. Is easy credit a liberator or a disaster waiting to happen, asks Kathy Sheridan
We felt the fear and did it anyway. That odd chemical aroma around the perfume and accessory counters in recent weeks was the smell of scorching plastic, of credit cards being swiped repeatedly. The steady stream of statistics from the Central Bank showing that we are living beyond our means failed to deter us. A recent report has us down as the second most indebted country in the EU, and predicted we would be top by the end of 2006. Last time we looked, we owed about €2.1 billion on our credit cards.
So are we feckless and reckless, maxing out the credit cards to finance the Gucci lifestyle and doomed to be still paying for Christmas at Easter - or even Easter 2016? The depressing longevity of credit-card debt is summed up in one statistic quoted by John Lowe, author of the Money Doctor Finance Annual: a €500 debt on which you are making only the minimum monthly repayment will take 11 years to clear.
Yet more than half that €2.1 billion credit-card debt will be repaid by only the minimum amounts - sometimes because borrowers haven't the money, but often, reckons Lowe, because they are too lazy and can't be bothered to investigate their options. Some simply move a debt to another credit-card company which seduces by offering 0 per cent transfer costs, "like loss leaders", and interest rates of 10 per cent - "but that's only for six months and then you're back to the 16.9 per cent . . . Disaster".
As for those whose income leaves them deemed unworthy of a credit card, they are at the mercy of the moneylenders.
"People who need to borrow €200 will pay back €300 in six months. That's a lot of money - and it's legal," says Lowe. The definition of an "authorised moneylender", he points out, is a person who will charge you a minimum of 23 per cent per annum in interest. And you thought your credit-card company was greedy?
When the Money Advice and Budgeting Service (Mabs), financed by the Department of Social and Family Affairs, started out 13 years ago, more than 90 per cent of its clients were on social welfare. Now, says spokesman Michael Culloty, more than a third are from the middle- income bracket. That's about 5,500 clients out of the estimated 17,000 that Mabs sees each year, on top of the 30,000 already on its books. Are these drawn from the ranks of the feckless?
"We don't see feckless people here. Or I haven't met any of them," says Culloty wearily. "What we see are people who are depressed and ill with worry. Is it madness to want to provide Christmas fare for your family? Or for someone who has to move away from his workplace to want to get a car loan? Or for a parent coming up to Christmas or a Communion to want to maintain their dignity and rely on credit cards to function during this crazy period? We rarely see feckless. All we see is worry."
THE NUMBER OF citizens of booming Ireland who identify with Richard and Patricia's plight is not clear. A widespread view is that the many people who survived the Christmas frenzy only by maxing out their credit cards are walking a financial tightrope. All it takes is one kick - a sick breadwinner, separation, loss of overtime or bonuses - to knock them off it.
The classic sign that you're in trouble, says Culloty, is "when you've started borrowing from Peter to pay Paul, that things are so tight you're unable to see your way". This is when one credit card is being used to pay off another, the car payments are not being made and the mortgage is always in arrears.
But are things that bad? It's worth noting that far from being a nation gone daft on credit, nearly two-thirds of Irish adults carry no debt that is not repaid in full by the end of every month.
But to look at the headline figures does appear to invite despair. Take the one that puts private sector credit at €252 billion. That appears to work out at a terrifying €84,000 debt for every adult. Right? Wrong, says Austin Hughes of IIB Bank. About €140 billion of that is borrowing by companies, and while the other €110 billion is indeed ours, about €95 billion of that figure is owed on property. All of which puts the €2.1 billion owed on credit cards in some kind of context: less than 1 per cent of total outstanding borrowings.
But the fact is that this kind of borrowing has soared by 15 per cent in the past year - from an average of €5,800 per adult to an estimated €6,500 - and the number of credit cards for personal use has risen by 7 per cent. So while we certainly don't owe €84,000 apiece, the average person's debt is a pretty €30,000 if you include mortgage repayments. And that's a 600 per cent rise over the past decade.
Hughes concedes that there are many people who have been "caught up in the lure of having 'made it', ie everyone else has their kids at fee-paying schools and you're a mug if you haven't property in Outer Mongolia at this stage . . . There are people who are susceptible to that and are taking out lifestyle loans to fund it. But there are always individuals who can't be protected, who will stretch things". Hughes reckons that there will probably be around 50,000 borrowers who are going to feel "a little crimped" by the rise in interest rates this year.
A report by IIB and the Economic and Social Research Institute (ESRI) last July, based on a survey of personal debt, suggested that one in five borrowers were finding their debts to be a heavy burden.
"That's about a quarter of a million who probably are stretching things a little bit and need to keep an eye on it," says Hughes. He notes that the comparable figure for the UK is one in 12. After ruling out other possible factors, he concludes that we worry partly because the experience of debt here is a "relatively recent phenomenon". By this reckoning, it's just a case of getting used to it.
AS THEY'RE WONT to say, the macro picture is bright. The most recent statistics show that there were 5 per cent (that's 96,000) more people at work in the past year; that the economy as a whole is growing fast, and is much stronger than the EU average; that our age structure is much younger; and that we have fewer houses (ie more people are living in each house), so we are building more. Unlike most other European governments, ours is not borrowing all over the place. Also, we have deposits of €58 billion, not to mention the €16 billion worth of SSIAs due to flood into the economy over the next couple of years. What the figures seem to be saying is that maybe, just maybe, we can afford to max out the credit cards occasionally.
According to IIB's consumer sentiment report published on Thursday, the public seems to agree.
December showed a big lift in consumer confidence for the third consecutive month, with one in three consumers now expecting a stronger economy in 2006, compared to just one in eight in September.
It's hard to avoid an accusing undercurrent that the nagging concern about debt may be merely a middle-aged thing. For most of us, access to liberal credit is indeed a recent phenomenon.
Commentator David McWilliams describes credit as the great "liberator" of the working class. But as Hughes points out, for a generation raised on the "neither a borrow nor a lender be" dictum, a generation for whom interest rates topped 20 per cent and tax meant being able to keep about 30p of every pound, a generation for whom redundancy meant Dún Laoghaire and the boat, debt will always be a cause of nervousness. The IIB/ESRI report on the burden of personal debt seemed to confirm this. Nearly half of those who expressed "significant" concerns about the burden of debt were in their 40s.
"It is scary", says Hughes. "It's like going in a very fast car - but I suppose you're just as likely to be killed in a clapped-out banger going a lot slower."
NONETHELESS, HE SOUNDS a caution here, suggesting that one important reason why debt may seem such a burden for the over-40s is because many are still borrowing on the rather dangerous assumption that it will only hurt seriously for a couple of years until their rapidly inflating salary kicks in to make it manageable again. But what was a truism 15 or 20 years ago no longer applies. Consistently low inflation (forecast at 2.5 per cent for 2006) means the value of the burden now remains for longer, a fact for which some in this age group may not be prepared.
John Lowe, the money doctor, understands how people lose sight of their finances. "It's such a boring subject," he says. "Things get glossed over. It's only when it becomes impossible to breathe that they come to people like us."
It's notable that among the top-selling books in the shops are personal finance bibles by gurus such as Lowe, Colm Rapple and Eddie Hobbs.
For those who want to consult a financial adviser of some kind, Lowe insists on the importance of choosing a truly independent one. (Lowe himself is an "authorised adviser", meaning he represents the products of all 13 lenders in this country as opposed to being a "mortgage intermediary" who is limited to representing only some of them.) But for those who just want to get their heads straight first, what is his advice for 2006?
"If you accept that you're just going to keep repaying the credit card at the minimum, you're in trouble," he says. "You need to sit down and look at yourself from a completely holistic viewpoint . . . Make your own money plan every year. Then, every month, sit down and spend a few hours reviewing your financial situation."
Borrowed time: a seasonal story
Typical examples of the Money Advice and Budgeting Service's new middle-income clients are Richard and Patricia. They got married two years ago and had to move 30 miles from the city to afford a home. Patricia got a job locally but Richard had to commute, so he had to get a car, funded by a three-year loan which he could cover by working overtime.
They were a sensible pair, using their credit cards wisely and repaying them in full every month. Both were Credit Union members with small savings and small loans to pay off.
They had their first child last May and Patricia gave up work because the cost of childcare simply didn't add up. In November Richard was told there would be no more overtime. But even before that, the loss of Patricia's salary was beginning to bite and they had started arguing.
Everyone else on their estate seemed to be doing fine. No one guessed that things had become so difficult for them. They began to use their credit cards - he had a limit of €2,000, she had one of €5,000 - to maintain lifestyle and appearances, at least over Christmas. From the start of December, almost everything went on the cards, apart from the mortgage, car loan, credit union loans and utility payments which were funded from Richard's income. On his card alone, he clocked up €1,256 for clothes, nights out with workmates, gifts and general Christmas expenses. Patricia spent €900 on clothes for herself and the baby as well as gifts and entertaining.
Richard went back to work last Tuesday. Patricia is waiting for the bills. It was hard enough to make ends meet before Christmas, but now light, heat and telephone are going to cost even more. Meeting ordinary costs is going to be impossible, never mind working out how to pay off two credit cards at high interest rates. They need to do something. How to do it without starting more arguments is just one of Patricia's worries.