Brits are borrowing on credit cards at the fastest pace in 17 years as inflation bites
Brits are racking up credit card debt at the fastest pace in 17 years, Bank of England data showed, as rising prices and difficulties in balancing household budgets boost borrowing.
Credit card borrowing rose a net 740 million pounds ($869 million) in July, the BoE said, down from 945 million pounds in June but 13% up year-on-year and the biggest annual increase since October 2005.
A broader consumer credit scale, which also accounts for overdrafts and unsecured personal loans, rose 6.9%, the fastest annual rate since March 2019.
The surge in borrowing comes as wages have not kept pace with inflation, which is now more than 10%, the highest in 40 years, and many households are struggling to make ends meet.
According to the Office for National Statistics, annual wage growth was 6.2% between March and May.
Sharply rising energy costs are likely to exacerbate the cost of living crisis in the coming months.
Analysts noted that rising consumer borrowing can often reflect household optimism when deciding to purchase durable goods. However, with consumer confidence at its weakest since surveys began nearly 50 years ago, the current trend has signaled that Brits are using credit to maintain their standard of living.
“The decent rise in consumer credit values in July may overstate the current resilience of real consumer spending as credit is bolstered by rapid consumer price inflation,” said Paul Dales, UK chief economist at Capital Economics.
“Anyway, with household purchasing power set to take a big hit when utility prices rise 80% on Oct. 1, the outlook for consumer credit is bleak.”
Another tightening of consumer wallets is the rise in the cost of borrowing, reflecting the central bank’s hike in interest rates to tame inflation. In particular, the BoE noted: “The ‘effective’ interest rate – the rate actually paid – on new mortgages increased by 18 basis points to 2.33% in July, the highest since June 2016 (2.39%).
The BoE is forecast to hike interest rates from 1.75% to 4% over the next 12 months. However, this trend is also helping wealthier households to reallocate money to fixed-term deposit accounts with higher interest rates.
“Term deposit inflows remained strong at £2.8 billion, the highest since November 2010,” the BoE said.
Still, Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, suggested that such savings might need to be harnessed if economic conditions worsen.
“Households’ incentive to use their savings to pay off debt rather than support their consumption will increase as interest rates continue to rise. Access to credit could also deteriorate if the unemployment rate starts rising soon. Accordingly, a recession in Q4 and Q1 next year will only be avoided if government support is massively increased,” said Dickens.