TIME EUROPE
JANUARY 17, 2000 VOL. 155 NO. 2
Debt Easy
As Europeans lose their inhibitions about borrowing, finance companies will step up efforts to sell you revolving credit
By ROD USHER
Like a Formula One race car, it looks sexy, travels dangerously fast, chews a lot of energy and can be uncomfortable to get out of. Almost everyone experiences it at some stage in life. The Spanish call it deuda; the Italians debito. For Germans, it's Schulden, not coincidentally from the same root as their word for guilt. In English, its silent b makes it tricky for young spellers. Debt.
Typically associated with honor, shame and mercy--or the lack of same--going into debt has come a long way since the days when Shylock demanded his pound of flesh in Shakespeare's The Merchant of Venice. Mortgages, car loans and bank overdrafts are the respectable norm for most families, with the repayment periods for some borrowings sometimes looming so large that it has become known as buying on the never-never. But a newer form of debt that might be called the never-ever is steadily becoming the popular way to get into the red. Better known as revolving credit, its purveyors have hungry looks directed at various parts of Europe.
Revolving credit is a form of personal debt that comes via those small plastic rectangles carried by 72% of adults in the U.S. and 49% in Britain. The U.K. figure has climbed dramatically in recent years, with about 1,300 different card products now slugging it out for market share. Continental Europe lags far behind these levels, but U.S. and British card companies are planning to change this. In their way is a web of cultural attitudes to debt, regulatory barriers and locals determined to protect their own lending systems.
"There is enormous demand for credit in Europe," says Scott Anderson, editor of Cards International, a biweekly trade publication. "You just have to channel that demand toward revolving credit cards." Others think the pickings are leaner. "The [Continental] credit card markets are unlikely to reach the scale of those in the U.K.," says Ian McEwen, of investment bankers Lehman Brothers. "There's profitable business to be done, but the market size has been way overestimated."
However big the cake, the companies fighting for a slice of it are all seeking a particular kind of borrower: one who can be relied upon to keep paying back, but not too fast, and not fully. These are the millions of people who allow debt to spill over, or revolve, from one repayment period to the next, letting it grow ever larger. Revolving credit is on the face of it more attractive than traditional loans. There is no cap-in-hand application to a bank manager, and the pace of repayment is flexible. Cards avoid some of the risks of cash; they are the currency for Internet trade and the main one for telephone and mail buying.
Their appeal is shown by the fact that in Britain credit outstanding on Visa and MasterCard credit cards at the start of August 1999 was about $43 billion, up about $8 billion on the previous year and almost double the 1996 figure. And though the Continent lags that growth, in June 1999 issuers of Visa cards alone were collecting interest on up to $2.4 billion in outstanding balances in Spain, up 14% since 1997, while Germans were carrying outstanding Visa card balances of $773 million, compared to just $278 million two-and-a-half years ago.
But there is a dark side to this apparent financial freedom. Unlike charge cards, which must be cleared each month, or debit cards, which are simply a way of accessing a bank account, credit cards, aside from an obligatory minimum payment, bring a choice each month: clear the entire debt--avoiding interest--or roll some or all of it over. The latter entails interest rates often around 20%, more than twice that on a typical bank loan. Card companies may increase the initial borrowing limit if minimum repayments are made--often without the client asking for it. It is this spin, both revolving and expanding, that can leave the unwary in quicksand.
About 5% of all U.K. cardholders get into trouble, according to Frances Walker of the Consumer Credit Counselling Service, a charity helping people with debt problems. Misuse of cards is often caused by poor budgeting, coupled with unexpected setbacks such as job loss, divorce or illness. Walker says the typical person seeking the charity's help is in his or her mid-to-late 30s and owes about $30,000, including credit card debt, to an average of nine different creditors. But the number of young people with credit card debt problems is growing fast. "We're getting people of 20 with more than $15,000 debts [of various kinds]," she says. "That's quite a lot considering that they've only had credit for two years. I think it's a trend that's going to continue."
But even though a percentage of clients will always bite off more debt than they can chew, fail to keep up the repayments and enter a spiral that can end in bankruptcy, charging interest rates in the high teens usually offsets those losses. An indication of how potentially lucrative it is to have lots of people owing you money can be seen from the number of cardholders who opt to revolve: in Britain, where there are now more than 41 million credit cards, about 30% of holders are always revolving their debt, while another 40% bounce between paying off and rolling over their balances. It is the interest on this fluctuating but continual borrowing--which typically blows out around Christmas--that gives card companies the bulk of their profits.
While Britons have had credit cards since 1966, it was the arrival a few years ago of a slew of American card companies that really ramped the plastification of Britain. It is these same U.S. firms--now with wide-awake British competitors--who want to promote revolving debt across the Channel. They include Delaware-based MBNA, Illinois-based Household Finance Corporation, Capital One from Virginia and the People's Bank of Connecticut. Arrivals last year included Chicago-based Bank One--one of the world's largest credit card issuers--and Morgan Stanley Dean Witter.
The Americans bring experience and marketing skills, and in Britain face few restrictions other than that cardholders must be over 18. They can tout their wares directly, or through what are known as teaser rates--low interest for an initial six months or so before a jump to the usual wham of 15% to 20%. Some astute borrowers now "card surf," moving to a new company when the initial rate expires.
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