For the first time, consumer debt has broken through the £1 trillion barrier. Nick Morrison looks at how a thrifty nation turned into borrowers, and asks if we're just storing up problems for the future.

JUST a generation ago, debt was a four-letter word. Borrowing meant you were living beyond your means, a sign of moral as well as financial bankruptcy. Hire purchase was an acceptable way of paying for cars and fridges, but for everything else, if you couldn't afford it, you didn't get it.

Yesterday, the Bank of England revealed that the amount of money we owe has broken through the £1 trillion barrier - a thousand billion, or a one followed by 12 noughts. It is the equivalent of the entire national earnings of the 155 poorest countries in the world, and it has doubled in just seven years.

Now, we are a nation addicted to borrowing: from mortgages to credit cards, personal loans to store cards, if we can put off paying for it today, we will.

Our accumulation of debt, the equivalent of around £17,000 for every man, woman and child in Britain, is partly the result of credit becoming more readily available, according to Rob Jones, director of studies for business accounting and finance at Newcastle University Business School.

"The market has been deregulated and there are lots of people offering credit, and vast amounts of junk mail offering loans, so the supply is there, and with interest rates being low, it is much easier to service that debt," he says.

The lowest interest rates for 50 years, until this year's increases, fuelled the credit boom, as more people found they could afford to pay off loans and take out bigger mortgages. But on top of this there has been a gradual shift in attitudes towards debt, eroding the social stigma once attached to living on the never-never.

'People are more accepting of it now. Credit cards have only been around for 30 years, but for people in their 20s and 30s that is their entire life, so they have always had them," says Mr Jones.

As the world's fourth biggest economy, the level of debt itself is not a problem, says Professor Tony Cockerill, economist at Durham University Business School. And with around 80 per cent of that debt in the form of loans against houses, such as mortgages and re-mortgages, and house prices having risen sharply over the last few years, the increase in our debt has to be seen against the increase in value of our assets, worth around £3 trillion at current prices.

But there could be problems in store if interest rates rise sharply. The Bank of England's Monetary Policy Committee met yesterday, with another quarter per cent rise expected to be announced next Thursday, but inflationary pressures from the highest oil prices since the 1970s may persuade them that a bigger rise is necessary.

The Bank warned last month that the level of household debt could be a "considerable challenge" if interest rates were to keep rising, and counselled that outstanding debt stands at 135 per cent of household income, compared with seven years ago, when we owed as much as we were earning.

"The Bank of England's approach is that they're looking for a gradual increase in interest rates, but if inflation starts to look a threat, as a result of oil prices and the continuing boom in house prices, then we might see interest rates go up at a faster rate," says Prof Cockerill.

"The capacity to service debt then becomes much more challenged. If interest rates go up from four per cent to eight per cent, then for people on an interest-only mortgage their repayments will double, and that is an enormous pressure on household income."

And with so much of our assets invested in bricks and mortar, a sharp fall in property prices could have a dramatic effect. "If interest rates increase and house prices collapse, we could go into a re-run of the late 1980s-early 1990s recession. I think it is more likely that it won't happen, but it is a risk.

"We're not on the brink of the abyss, but it is important in terms of the economic radar to have these risks on the screen and to do something about them," says Prof Cockerill.

There is a positive side to debt, which is that the UK economy is very much driven by consumer spending, accounting for around 70 per cent of all economic output. The Bank of England may want to see a slight re-adjustment away from consumer spending and towards business spending and exports, but if we didn't borrow we wouldn't be able to spend as much, which means there would be less money going into the economy.

But the obsession with borrowing to spend can have devastating consequences, according to David Thomson, of North-East based Debt Advice Agency.

He says that while many people accept debt as a fact of life, it usually only becomes a problem if we have a change of circumstances, principally losing a job, but also serious illness or a relationship breakdown. And when this happens, he says the credit industry as a whole should take some of the blame.

"The whole industry has been encouraging us to get into debt and has been making it ever easier. Everywhere you go they are offering you a store card and every time you get your post there are offers of a loan," he says.

Low interest rates have encouraged people to take on bigger mortgages than they could have otherwise afforded, and to extend mortgages to pay for home improvements. But a rise in interest rates could hit them hard. "Everybody has forgotten the late 1980s and early 1990s, when we had 14 and 15 per cent interest rates," he says.

He says among the biggest culprits are credit cards and store cards, which charge crippling rates of interest on any outstanding debt. Paying the minimum monthly repayment on a £3,000 credit card debt, it would typically take 18 years to pay it off, involving repayments of around £7,000, he says.

But if we turn away from debt and start saving, the repercussions could be just as serious, according to Mr Jones. "If you have a situation where people run up a fair amount of debt and all of a sudden they change their minds and cut back on consumption, that has an effect on demand for goods and services, which means people are less secure in their jobs and more likely to rein back and you get into a spiral of problems.

"The big thing is mood and perception. If people think unemployment is low and they feel reasonably comfortable, then we may be all right," he says.

But if confidence starts to falter, then house prices, widely seen as overvalued, may fall rapidly. If this happens, then, coupled with the stock market falls of the last few years, the value of our assets will be sharply diminished.

"The trouble with accumulating all this debt is it will need paying off in the future," says Mr Jones. "There is going to be a landing, and it is whether it is going to be a soft landing or a hard landing.

"If house prices fall and unemployment goes up and you have a lot of people being made bankrupt, you get into a cycle. It is the hangover that follows the enjoyment of consumption."