Demand for consumer credit surges to £706m in October

Latest Bank of England data has shown that October saw a surge in credit card borrowing.

Consumers borrowed a net additional £706 million last month, with new credit card borrowing accounting for £637 million of the credit, the largest amount of card borrowing since July last year.

Between the start of the pandemic and April this year, there have only been two months when consumers borrowed more than we repaid. Since May, this has happened in five of six months.

Mortgage approvals fell to their lowest level since July 2020 last month, with the end of the stamp duty holiday prompting a decline in activity with figures showing that lenders approved 67,199 mortgages in October, down from 71,851 in September and a high of 104,547 recorded in November 2020.

With October’s number close to the 66,700 12-month average in the year to February 2020, the Bank noted that the market is returning to its pre-pandemic level. The report also shows that the amount borrowed fell to a net £1.6 billion, from £9.3 billion in September.

The annual growth rate for all consumer credit remained weak, but increased to -1.0% in October from -1.7% in September. The annual growth rates of credit cards and other forms of consumer credit were -3.2% and -0.5% respectively.

Commenting on the Bank of England’s monthly Money and Credit statistics, Paul Heywood, Chief Data & Analytics Officer at Equifax said “In October, consumers continued to borrow more than they paid off, accruing extra debt ahead of an expected increase in interest rates next month. This could be a sign of growing consumer confidence and solid post-pandemic recovery, but also suggests that people are keen to take advantage of ultra-low interest rates while they can. October’s net borrowing of mortgage debt by individuals is the first sign of a potential retrench, as it reached its lowest since July 2021.”

“If the Bank of England does choose to increase interest rates next month, we can expect to see demand for credit fall fairly sharply as consumers weigh up the rising cost of borrowing, and some find that they cannot afford to open a new credit line. Lenders are going to be watching out next month on how the Bank’s decision goes, and will also need to keep a close eye on the customers that might be in vulnerable financial situations, to ensure that rising rates don’t translate into a spike in arrears and loan defaults. Open Banking is helping lenders spot the signs of financial difficulty with more accuracy, and it’s a good idea for borrowers to check their credit score to see if there’s room for improvement; it’s quite possible that qualifying for a more attractive rate could help to mitigate the impact of a rising base rate.”

Jonathan Sealey, CEO at specialist lender Hope Capital, said “The publication of the Bank of England statistics reveals individuals borrowed £1.6 billion of mortgage debt on net in October, compared to £9.5 billion in September. This comes as no surprise, considering September’s increase would have been driven by borrowing ahead of the winding up of the stamp duty holiday.”

“The fall in Mortgage approvals was also to be expected and was very likely owing to the aftermath of the furlough scheme. Looking ahead, with interest rates expected to rise in the near future, it is likely there will still be a significant number of investors taking advantage of the low interest rates currently available in the market.”

Sarah Coles, Senior Personal Finance Analyst, Hargreaves Lansdown said “The spending squeeze has helped to spark the return of the credit card, and a slowdown in savings. Over the past couple of months, credit cards have made a comeback, with borrowing of £600 million in both September and October. Meanwhile, our enthusiasm for saving has waned: savings fell to their lowest since the onset of the pandemic on October. It’s less than half the average of the past 12 months, and isn’t far from pre-pandemic averages.”

“The spending squeeze has played a major part in this. Rising prices have hit hard. CPI inflation soared to 4.2% in October, hitting its highest rate in a decade. It wasn’t just one-off costs like home improvements and second-hand cars, some of the biggest rises were in the cost of the basics, which we couldn’t avoid. Among the most striking was the £139 hike in the energy price cap, causing financial headaches for millions of us, while energy company failures meant even bigger rises for hundreds of thousands of people.”

“With the spending squeeze likely to inflict pain over the coming months, this could mean a pattern of borrowing more and saving less could be here to stay. This isn’t the only force at work though. The Christmas shopping season started earlier this year, as concerns about shelf shortages persuaded people to go early. We were also getting more confident about restarting our social lives, and spending more on going out.”

Separate Bank of England figures showed that large businesses borrowed £2 billion in loans from banks in October, whilst small and medium-sized businesses repaid £1.6 billion. Private non-financial companies (PNFCs) raised £0.3 billion in net finance from capital markets in October, compared to an average net issuance of £0.7 billion in the twelve months to September 2021.

The annual growth rate of borrowing by all large businesses increased to 0.9% in October, the first positive growth rate since February 2021.

The net loan repayment by SMEs of £1.6 billion in October was the largest on record and the seventh month in a row of net repayments by SMEs. The annual growth rate fell to -2.0% in October, the lowest since January 2015.