Consumer borrowing on credit cards rises at fastest rate since 2005

Latest data from the Bank of England has indicated that credit card borrowing grew by £730 million in the 12 months to July.

The 13% rise on borrowing on cards is the fastest rise since October 2005.

The annual growth rate for all consumer credit, which also includes overdrafts, personal loans and car finance, increased to 6.9% in July, hitting £1.42 billion. This marks the highest rate since the 7.2% seen in March 2019. The outstanding balances for consumer credit now stands at £204.4 billion.

Mortgage borrowing decreased slightly to £5.1 billion in July, from £5.3 billion in June. The data shows that gross lending rose to £26.1 billion from £24.6 billion the month before, while gross repayments increased to £20.8 billion from £19.4 billion.

Approvals for house purchases, which serves as an indicator of future borrowing, increased to 63,800 in July, from 63,200 in June. Despite the increase, July’s figure still fell short of the pre-pandemic 12-month average of 66,800 recorded in February 2020. Approvals for remortgaging came in at 48,400, up from 43,300 the month before. This remains below the 12-month pre-pandemic average of 49,500.

Commenting on the figures, Joanna Elson CBE, Chief Executive of the Money Advice Trust said “Today’s figures, showing the continuing rise in consumer borrowing, are a further sign of the relentless pressure that household finances are under. Confirmation on Friday of the huge hike in energy prices will have only added to the worries of millions of people concerned about how they will make ends meet in the coming months.  For many households, however, options are already running out, with more turning to credit to cover essential needs.  And for those who are already in difficulty, the situation is only set to get worse without intervention.”

“Government support is urgently needed now for those most affected.  This should include targeted help for those on the lowest incomes through significantly raising benefits.”

Paul Heywood, Chief Data & Analytics Officer at Equifax said “The most vulnerable have run out of quick fixes, which is why we continue to see considerable growth in demand for credit. They have cancelled recurring subscriptions, swapped to less expensive supermarkets, and reduced spending on clothes, food and holidays. Yet households are still struggling to make ends meet in the face of falling real pay.”

“It’s not just the vulnerable who are struggling. Our data shows a growing number of those on higher incomes are dipping into their savings to make up for the shortfall in disposable income. At the same time, we’ve seen levels of credit card borrowing balloon at the fastest rate since the mid-2000s. We expect this trend to remain on an upward trajectory, as the rising price of essential goods like energy and food persists well into the new year.”

“Most lenders would like to offer affordable credit to those that need it most, but when there’s this much economic uncertainty in the air, there’s always a temptation to focus on prime borrowers. At times like this, better data is the key to more informed affordability decisions, giving lenders the confidence to say yes to more people, more often, and give those in need the credit they deserve.”

John Phillips, National Operations Director at Just Mortgages said “Despite predictions of doom and gloom the housing market once again performed strongly with net borrowing in July only decreasing slightly from June and still £1 billion above the pre pandemic average.”

“With winter just around the corner the reality of higher energy costs will be coming sharply into focus very soon and household budgets will need to be adjusted accordingly but with house prices showing tremendous resilience the immediate future of the housing market remains strong. Feedback from our brokers across the country reveals that remortgage activity is increasing with homeowners keen to secure a competitive rate before further rises but there is also a steady flow of new borrowers. This is born out in today’s statistics that reveal approvals for house purchases in July, an indicator of future borrowing increased to 63,800 in July, from 63,200 in June.”

“Realism will be the watchword for prudent lending over the remainder of the year! Borrowers will need to have realistic borrowing expectations which, combined with professional advice from mortgage brokers will ensure they get the loan they want. Although the ‘effective’ interest rate on newly drawn mortgages increased
by 18 basis points to 2.33% in July, mortgage rates are still relatively low in historic terms and, with sensible lending policies any sort of future housing crisis can be avoided.”

Andrew Montlake, Managing Director of the UK-wide mortgage broker, Coreco said “The uptick in mortgage approvals shows there’s still demand out there for property, even as the cost of living crisis goes from bad to worse. The obscene cost of renting is certainly incentivising people to buy as it’s still often cheaper to own than to rent, even with the higher rates we have today. The balance of power has also shifted from seller to buyer in recent months and that’s encouraging people to buy as they’re able to negotiate much harder on price. The uptick in remortgages is also no surprise, as people seek to reduce their single largest outgoing ahead of the storm. The annual growth rate in credit card use will not go unnoticed by policymakers. It’s a clear sign of the stress millions of households are under.”

Richard Pike, Chief Sales and MarketingOofficer at Phoebus Software, said “The resilience of the housing market against the current economic backdrop is becoming par for the course, but how sustainable this is remains to be seen. Each month, when we expect there to be a drop in activity, the figures tell of buoyancy and continued appetite, albeit the pendulum swing from a seller’s market to a buyer’s market could start to bring prices down. As existing deals come up for renewal and also borrowers on variable rates look for the protection of being able to budget and therefore look to fix, re-mortgage activity will remain strong. Today’s figures do also show slightly more reliance on personal debt and one wonders how this trend will continue and what the longer term effect on areas such as affordability will look like because of this.”

“Although mortgage arrears fell again in Q2, the likelihood is that this trend will change in the coming months as interest rate rises begin to have more of an effect and energy and other cost of living prices rise. Lenders may need to offer more generic debt and budgetary advice to their customers who are unable to get in front of MAS and similar agencies due to pure volume of enquiries. A pro-active approach in these unprecedented times for many is required.”

Sarah Coles, Senior Personal Finance Analyst at Hargreaves Lansdown said “Credit card borrowing has grown at its fastest rate for 17 years. Runaway price rises have forced more of us to turn to credit, and there’s a real risk that more borrowing is on the cards.”

“The summer is always a particularly expensive time of year, but the surge in borrowing should ring alarm bells. The growth of credit card debt has accelerated as inflation has taken hold. While those on higher incomes will have been able to fall back on lockdown savings, and those on the very lowest incomes will have struggled to get more credit, those in the middle are increasingly relying on credit cards to help make ends meet. This feels like a solution to the inflation problem in the short term, but over time is going to end up making the problem even worse.”

“It’s worth noting that outstanding borrowing is still below where it was at the start of the pandemic. We currently have £62 billion of borrowing sitting on our cards, compared to £71.9 billion in February 2020. However, card debts have climbed significantly from the pandemic low point in March 2021 (£54.2 billion), and there’s every chance the pace of borrowing is going to build as times get even tougher.”

Separately the Bank of England figures showed that small and medium sized businesses repaid £0.3 billion of loans in July. This is less than the £1.4 billion repaid in June, and the 16th consecutive month of net repayments. Large non-financial businesses repaid £1.8 billion of bank loans in July, compared to £4.1billion of borrowing in June.