EconomyUK consumers turn to credit cards as cost of...

UK consumers turn to credit cards as cost of living crisis bites

UK consumers increased their credit card borrowing at the fastest annual rate in 17 years last month, according to figures published on Tuesday, in a sign of the intensifying cost of living crisis.

Data from the Bank of England showed that the annual rate of credit card borrowing was 13 per cent higher in July than a year before.

The jump, the biggest since October 2005, comes as wages fail to keep pace with inflation, which has already hit 10 per cent, with some investment banks suggesting it could roughly double by the turn of the year.

The figures are a sign that households are struggling with the soaring cost of living, even before households are hit with an 80 per cent increase in energy bills. This will take effect from October 1, and could leave many people with the choice of cutting spending or borrowing more.

The data also showed individuals took on a net additional £1.4bn in consumer credit in July, down from £1.8bn in June, but above the 12-month pre-pandemic average to February 2020 of £1bn. The additional borrowing was split equally between credit cards and other borrowings, such as car financing.

Thomas Pugh, economist at the consultancy RSM UK, said the BoE data “suggests that consumers are already battening down the hatches against what will almost certainly be an exceptionally tough winter”.

A rise in borrowing is usually associated with discretionary spending by consumers on non-essential goods and services. But with inflation running at the quickest pace in 40 years, real wages falling and consumer confidence at the lowest level since records began in the 1970s, several economists said that it was a sign of households borrowing more to maintain living standards.

Line chart of Annual % change showing UK credit card borrowing last month rose at the fastest annual rate since 2005

Paul Dales, chief UK economist at the consultancy Capital Economics, said: “Some of the increase in consumer credit in July may be because some households are already turning to borrowing to make ends meet.” But he added that the figures suggested that consumer spending was “not collapsing”.

Separate figures also released on Tuesday by the debt charity StepChange showed the proportion of new clients citing the cost of living crisis as their reason for debt rose 2 percentage points between June and July to 20 per cent.

The proportion of those seeking debt advice because they were behind on their gas bills and electricity bills also increased to 26 per cent and 30 per cent respectively. More than two-thirds had credit card debts.

BoE figures also revealed that households were saving less than before the pandemic. The combined net flow into both deposits and National Savings and Investments accounts in July was £4.6bn, below the average monthly net flow of £5.5bn during the 12-month pre-pandemic period to February 2020.

“The July money and credit data show that households continue to reduce their monthly savings, in an attempt to maintain their current level of real consumption amid surging inflation,” said Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, a consultancy.

UK inflation is expected to accelerate because of the surge in gas prices following Russia’s invasion of Ukraine. Citigroup, the bank, has forecast this month that inflation will rise to 18.6 per cent in January, while Goldman Sachs suggested it could reach 22 per cent.

Capital Economics’ Dales said that, with the consumer price index rising, “more households will probably need to borrow more to tide them over” and that “the outlook for consumer credit is weak”.

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