Consumers add £800m to credit card debt in cost of living crunch

5th May 2022

Latest figures from the Bank of England (BOE) have revealed that consumers borrowed an additional £1.3 billion in consumer credit in March, of which £800 million was new lending on credit cards, taking total credit card borrowing in the first three months of this year to £2 billion.

The figures show credit card borrowing was up 10.6% in a year, the fastest growth since 2006.

The borrowing figures are a significant leap from the fact that rather than borrowing more, in the same three months last year ,a total of £2.7 billion of money was repaid on credit cards.

Net borrowing of mortgage debt by individuals amounted to £7 billion, up from £4.6 billion in February. Whilst mortgage approvals for house purchases were little changed at 70,700 in March, and remains above the 12-month pre-pandemic average up to February 2020 of 66,700.

The figures showed that consumer credit growth increased to 5.2 percent in March 2022, the biggest increase since the onset of the pandemic, from 4.5 percent in February 2022. The annual growth rate of borrowing on credit cards was 10.6 percent.

Commenting on the figures Joanna Elson CBE, Chief Executive of the Money Advice Trust said “Today’s figures, showing consumer credit borrowing continuing to rise, may be a sign of the mounting pressure on household budgets.”

“Set against a backdrop of soaring energy costs and inflation at a thirty-year high, our concern is that more people are having to turn to credit to plug gaps in their budget. The risk is that this could be storing up problems further down the line if repayments are unable to be met.”

“For households who are already in financial difficulty and whose incomes are unable to keep pace with rising costs, the situation is more urgent. Further support is needed now, including significantly uprating benefits and targeted help for people struggling with rising energy bills.”

Paul Heywood, Chief Data & Analytics Officer at Equifax said “With inflation running at a 30-year high, the Bank of England is all but certain to raise interest rates on Thursday to an expected 1%. In principle, this is designed to increase the price of borrowing, reduce consumer demand, and take some heat out of spiralling prices, but, for consumers and businesses already in some form of debt, especially those on variable rates, it’s going to be hard not to see this as yet another ballooning bill on the balance sheet.”

“These macroeconomic factors mean people are borrowing more and paying down less debt, with one or two exceptions. However the forces driving credit demand are rarely this straightforward, and it’s important that we look beneath the bonnet to determine whether rising demand is driven by consumer confidence, financial hardship, or even anticipation of further price or interest rate rises.”

“Our data at Equifax suggests that financial hardship is the elephant in the room, with many more people in the UK entering a state of financial vulnerability and the number of people falling behind on bills also rising. These trends are set to become more pronounced in May and June as the energy price cap rise, council tax rises, and the hike in national insurance flow through to people’s wallets, so this looks more like the end of the beginning for the cost of living crisis than the beginning of the end.”

Dave Harris, CEO at more2life said “Looking at today’s Bank of England update, you could say that the outlook for the mortgage market is safe as houses. Alongside enduring demand, the sector is strengthened by growing remortgage activity triggered by the rising cost of living and a surge in lenders offering lower rates of interest on five and ten-year products than on two-year loans.”

“In light of the current economic backdrop, we might expect an uptick in borrowers fixing for longer and exploring later life lending, particularly as borrowers can take advantage of strong house price growth through releasing equity to address inflationary pressures elsewhere. In higher inflation environments like we’re seeing now, the value of advice shines through more than ever, meaning that the intermediary community has a pivotal role to play in connecting lenders and borrowers and creating the best outcomes for all.”

Sarah Coles, senior personal finance analyst, Hargreaves Lansdown said “We saw the March of the credit card this year, with borrowing up 10.6% over the previous 12 months. It’s the kind of borrowing frenzy we haven’t seen since before the financial crisis, and there’s a risk that rising prices are pushing us into debt.”

“To put this in perspective, card borrowing is rising from a real low, and we still have less outstanding on our cards than we did before the pandemic. The rise in card spending was also far lower than in February, so we’re not seeing uncontrolled desperation in action.”

“Instead, this is a steady drip of increased borrowing, month after month, that tends to come alongside rising prices. Our research shows that two thirds of people have eaten through at least some of their lockdown savings, and those with nothing to fall back on may feel they have nowhere else to turn, Our research also shows that more of us are falling into debt by the end of the month, and almost one in three spend at least some time every month in the red.”

“Credit cards feel like a solution in the short term, but when you’re having to pay interest on your debts, it makes it even harder to make ends meet. And while prices continue to rise, stretching your money to cover your bills and your debts is going to get more difficult every month.”

Separately large businesses’ borrowing from banks fell to £1.9 billion in March from £4.3 billion in February, while small and medium sized businesses repaid 700 milion of bank loans.