Credit card borrowing falls

Consumers cut back on credit card borrowing in May, according to figures from the Bank of England.

Consumer borrowing fell to a four-month low of £800 million in May, from £1.4 billion in April, with May’s total also below the pre-pandemic average of £1bn. Analysis shows that credit card loans accounted for £400 million of the total. Credit card debt was up 11.2% in a year (the highest since March 2020)

The average interest rate on personal loans fell to 6.49% in May. Rates on credit cards rose to 18.38% from 18.08% in April.

Consumer credit growth remained at 5.7 per cent in May 2022. The annual growth rate of credit card borrowing and other forms of consumer credit was 11.2 per cent with outstanding balances for consumer credit now standing at £202.2 billion.

The data also shows that mortgage approvals rose to 66,200 in May from 66,100 in the previous month, showing that demand remains strong. Overall mortgage borrowing was at £7.4 billion, up from £4.2 billion in April and above pre-pandemic averages.

Approvals for remortgages were static across the month, at 47,800 and at a value of £10.2 billion. This remains below the 12-month pre-pandemic average up to February 2020 of 49,500.”

Jane Tully, Director of External Affairs and Partnerships at the Money Advice Trust said “Today’s figures, showing a continued high level of consumer credit borrowing, are a worrying sign of the continued strain on UK household budgets. At National Debtline we regularly see people relying on credit to cover essential costs such as food, energy and council tax – more often than not, it is a sign of financial difficulty.”

“With consumer credit borrowing growing over the last 12 months, and rising costs showing no sign of abating, there are real concerns struggling households will find it difficult to repay when the time comes. While the Government has introduced welcome support to help with rising costs, accessing this support is becoming more urgent for people who are having difficulty meeting their basic costs.”

John Phillips, National Operations Director at Just Mortgages, said “Borrowing and lending levels continue to increase above what anyone predicted they would, almost doubling again in May. Doom merchants who predicted the housing market would fall off a cliff when the pandemic hit were badly wrong. Levels of borrowing and house buying have defied expectations and are now higher than pre-pandemic, although it must raise the question just how much longer can these increases continue.  We may well see a tail off in house purchases as the cost of living continues to rise, but instead it will drive remortgages as people look to lock into longer term fixed rates to protect them from interest rates that look set to increase several more times yet.”

Paul Heywood, Chief Data & Analytics Officer at Equifax said “With inflation reaching a 40-year high of 9.1% in May, it remains a beast that must be tamed, and the Bank of England will no doubt be forced to implement yet another consecutive rate rise.”

“Such economic uncertainty and financial anxiety is driving consumers to take on further borrowing in order to help alleviate unfavourable market conditions and the worsening housing crisis. Furthermore, as the cost-of-living crisis further strains household finances, savings and disposable incomes are eroding, causing many people to pay down less debt.”

“Nevertheless, with economists speculating that the base rate may need to rise, with some predicting as high as 3%, to combat soaring inflation, such high-rate hikes will be felt by people across the country as debt repayment becomes much more expensive. With our research indicating that more people in the UK are becoming financially vulnerable, it is critical that savers consider fixed rate offerings and avoid spending beyond their means if possible.”

Alastair Douglas, CEO TotallyMoney said. “With wages lagging behind rising inflation, consumers are struggling to get through the month without borrowing to keep them afloat. If they are matched with the right products, and stay on top of repayments, it can be an extra dose of flexibility that is very helpful as the cost of living increases.”

“However, there is a whole segment not reflected in these figures: consumers who are blindsided by the credit market and left with nowhere to turn. Our research found that an incredible 20.2 million people in the UK are unable to access mainstream credit to help manage their finances, an increase of 50% since 2016.

“Regulation hasn’t evolved to enable lending to this group, and data is fiercely guarded so that consumers have no way of understanding their options. Ultimately, this will turn them towards more unregulated options: over 1 million people are in debt to loan sharks. That is preventable.”

Sarah Coles, Senior Personal Finance Analyst at Hargreaves Lansdown said  “It was a miserable May for borrowing. The figures reveal a double debt warning, with more of us borrowing more on things like credit cards and mortgages in an effort to stay on top of rising prices, while mortgage approvals hold steady, despite it starting to be predicted that the heat is coming out of the market.”

“Mortgage approvals are a useful measure of the health of the property market, because they show just how keen buyers are right now. The fact that approvals are still below the pre-pandemic average in May is perhapsanother sign of the heat coming out of the market.”

“It comes on the day that Zoopla said housing prices went nowhere in May, up 0.1%, which is the slowest monthly rise since December 2019 – before the pandemic hit the UK. It’s now showing annual rises of 8.4%, so as far as Zoopla is concerned, the days of double-digit growth are over. It also noted that while demand from buyers was still high, it is dropping on a daily basis, which means it’s taking longer to agree a sale – in London this has stretched to 35 days.”

“We’ve heard the first notes of caution about the future of house prices too, and the first predictions of property price falls. And while these are currently a few lone voices. price growth is highly likely to drop back to at least low single figures by the end of the year.”

“Meanwhile, we borrowed another £400m on credit cards. The horrific price rises in April will have left millions of people with a financial headache in May, and while some people have lockdown savings to fall back on, plenty are being forced to borrow instead. Even before Awful April and Miserable May left us struggling to make ends meet, we were falling back on our credit cards more. The only glimmer of hope is that credit card borrowing is slightly below the 12-month pre-pandemic average.”

Separately large non-financial businesses’ repaid £1.9 billion of bank loans in May compared to £2.6 billion borrowing in April. Small and medium sized businesses repaid £0.2 billion of bank loans in May, less than the £0.5 billion repaid in April and the 15th consecutive month of net repayments.