Consumer credit falls in December

Latest Bank of England (BoE) data has shown that consumers borrowed an additional £500 million in consumer credit in December, with this a steep drop on the £1.5 billion borrowed in November and below the previous six-month average of £1.2 billion.

Net credit card repayments came in at £0.5 billion, while £1 billion of borrowing came through other forms of consumer credit, such as personal loans and car finance.

Meanwhile, mortgage lending fell by over a fifth in December, the fourth consecutive month that the number of borrowers has declined.

The data reveals that 35,600 mortgages were approved in December, the lowest level since May 2020. The total amount borrowed fell by a quarter, from £4.3 billion in November to £3.2 billion in December. The report also shows that the average interest rate paid on new mortgages in December increased by 0.32% to 3.67% – the largest monthly increase since December 2021.

Commenting on the Bank of England Money & Credit data, Richard Lane, Director of External Affairs at StepChange Debt Charity, said “December’s rise in the proportion of new StepChange clients in arrears on priority debts like gas, mortgage payments and council tax, combined with a month-on-month increase in the proportion of new clients unable to make ends meet, is a real cause for concern.”

“We have had an exceptionally busy start to 2023 and while January is always a busy month, the relentlessly high demands of the cost of living crisis on people’s finances are clearly forcing more and more people into difficulty. The Bank of England’s new data suggests that a consistently high number of people are turning to borrowing to mask a shortfall in income or to cover unexpected expenses. With our own data showing a higher proportion of people unable to keep up with even the most essential bills, the warning signs of substantially more people being swept into financial difficulty are there for all to see.”

Emma Steeley CEO of Freedom Finance said “With consumers stocking up early ahead of Christmas with fears around potential shortages and the impact of industrial action, credit card borrowing U-turned from an almost two-decade high in November to net repayments in December.”

“It is great news that despite the cost-of-living crisis and economic uncertainty, people appear to be managing their debt sensibly and reduced total credit card borrowing. Other forms of consumer credit saw a notable increase in December with £1 billion of new borrowing (the highest since October 2019) through the products such as personal loans and car finance.”

“The cost of borrowing has risen sharply over the past year with average household quoted rates on credit cards reaching 22.46%, their highest levels since 1998, while personal loans posted their highest quarterly increase of all time in Q4 2022.”

“The shift from credit card borrowing to other forms of consumer credit therefore perhaps reflect a change in attitude as consumers start to consolidate some of their more expensive debt into products with typically lower rates such as personal loans. With the era of cheap money looking to be at an end for at least the next few years, consumer demand for alternative borrowing products, such as secured loans, could well see an increase over the coming months.”

“It remains incredibly important that everybody accessing the consumer credit sector is exercising best practise when searching for products. Shopping around and taking advantage of the latest technologies means would-be borrowers can find the best rates available to them without fear of being rejected and damaging their credit score.”

Paul Heywood, Chief Data & Analytics Officer at Equifax UK, said “With the UK economy steering ever closer to a recession, you’d be forgiven for thinking that consumer borrowing would follow the downward trend, however, today’s figures from the Bank of England reveal that despite the toughening economic situation consumers have not turned away from borrowing to support their current financial needs.”

“While business and consumer confidence may be at, or nearing, all-time lows in the first quarter, there still appears to be an appetite for credit from the nation’s consumers. Before Christmas, we saw an increase in the adoption of BNPL and so-called ‘pay day’ loans to make up the shortfall in earnings many were experiencing, and it seems this trend may continue into the new year.”

“The credit sector will prove resilient in the face of ongoing uncertainty and while there are there are challenges to be faced, the sector will remain committed to providing customers support in navigating any economic uncertainties ahead.”

Helen Morrissey, Senior Pensions and Retirement Analyst at Hargreaves Lansdown said “Storm clouds continue to gather over household finances as the cost-of-living crisis continues to stretch household budgets to their very limits -and in many cases beyond. The hard-won savings buffers accumulated during the pandemic are running low meaning more households will need to resort to credit, and the once buoyant housing market appears to have deflated with mortgage approvals dipping for the fourth successive month. Some households are still able to save but the amount they can afford to put away is on the decline in a sure sign that the cost-of-living crisis is affecting pretty much everyone.”

“The property market has been strong for so long but a heady mix of the cost-of-living crisis, rising rates and a looming recession means it is rapidly running out of steam. Mortgage approvals are down to their lowest since May 2020 as many people decide to put off that dream house purchase -either because they were scared off by the mayhem of last year’s mini-budget or their budgets no longer stretch as far as they did. Predictions of house price falls in the coming months are also likely to be a factor as would-be buyers decide to wait and see if they can snap up that home for less money and would-be sellers decide to wait that bit longer before putting their home up for sale.”

Adam Oldfield, Chief Revenue Officer at Phoebus Software, said “Mortgage approvals in December were unsurprisingly down, given the lack of consumer confidence in recent months.  We may also have expected to see consumer borrowing increase around Christmas, but that was not the case.  This shows that consumers were being more circumspect and were not prepared to throw caution to the wind by adding to their debt when the economic outlook remained uncertain.”

“Moving forward there is of course the next MPC interest rate decision on Thursday to factor in.  The majority of economists believe that the bank will raise the base rate again, but it is by no means a foregone conclusion.  Even if the bank’s rate does go up it may not have the immediate effect on mortgage rates that consumers tend to associate with a base rate rise.  We have seen the average two and five year fixed rates falling since November as lenders battle it out for new and continuing business.  Continually changing rates and criteria, along with the increased chance of some borrowers starting to struggle as the cost of living increases, means that the right technology and resources will be vital for lenders.”