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Credit card debt is soaring how worried should we be?

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Published: 24 Jun 2022

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Many years ago, before the financial crisis, I remember talking to a group of youngish people who, by their own accounts, were living high on the hog. They were doing so by essentially living on credit card debt. At the time, many providers were offering 0% interest for six months on balance transfers and the young people were playing the system, moving their debt from one 0% balance transfer deal to the next.
Then, of course, things changed. When the banks got into trouble, the 0% deals dried up, and did not reappear for several years. I often wonder what happened to the youngsters when that happened. Perhaps they were bailed out by the Bank of Mum and Dad. 

The question is whether some of those bad habits are starting to return, and that credit card bingeing is back in fashion. As everybody knows, we are in the middle of an intense cost-of-living squeeze. There has been an expectation that households would use some of the “involuntary” savings they built up during the pandemic to get them through the crisis. They are known as involuntary savings because people could not spend on some of the things they normally do, including commuting, holidays, eating out and entertainment. 

Something odd, however, has been happening. In the first big month of the squeeze, April, Bank of England figures showed that, far from running down their deposits, in net terms households built them up. There was an increase of £5.7 billion in bank deposits during the month, plus an additional £600 million invested in National Savings, making £6.3 billion in all. Households are still saving more than they were before the pandemic. 

Not all of them are, however. While some were being prudent, others were racking up debt, and in particular credit card debt. It may be that some people’s way of coping with the squeeze is to borrow their way through it. 

Bank figures showed that the annual growth in credit card and other consumer credit was 11.6% in April, its highest since November 2005, which on the face of it is concerning. Of the £1.4 billion monthly rise in consumer credit, £0.7 billion was on credit cards. 

Lesson One, Page One of the personal finance handbook is not to rack up credit card debt. It is a crazily expensive way to borrow, and some are getting worried about it. Citizens’ Advice recently pointed out that people are borrowing, much of it one credit cards, to meet their payments on “buy now, pay later” debt with providers such as Klarna. More than a quarter of the borrowing for this purpose was on credit cards. That looks like a very slippery slope. 

How big are the dangers? Credit card debt, currently running at a total of £60.9 billion, is not huge. It is less than a third of the total of consumer credit, £201.9 billion. It is tiny in comparison with the total for household debt, £1,786.6 billion, the overwhelming majority of which is secured mortgage debt. Credit card debt is rising fast but remains below the pre-pandemic level of £72.2 billion. 

Though credit card debt is not huge, its rise leaves two worries. The first is that it could be indicative of the return of the risky behaviours that have got us into trouble before. Should the current difficulties for the economy deepen, and tip us into recession and rising unemployment, the current generation of credit card borrowers could find themselves in as much difficulty as the class of 2007-8. 

The second concern is that the sharp rise in credit card debt we have seen came at the very start of a cost-of-living squeeze that will get worse before it gets better. If things are tough now, how much tougher will they be over the autumn and winter, and how much will people turn to their credit cards? 

The Bank of England’s next Financial Stability Report, in July, will be interesting on this. Its last such report, in December, was when we were in what seems now like a different world. The Bank then had more concerns about corporate indebtedness than households. 

“So far, UK households’ finances have remained resilient as Covid-related support measures – such as the furlough scheme and the ability to take a payment deferral on mortgages and consumer credit – have ended,“ it said then.   

It remains to be seen if the Bank shows greater concern in its next report. There was just a hint of this in the minutes of its most recent Financial Policy Committee meeting in March. “An increase in the cost of living, partly due to rising energy and other import prices, is likely to affect household resilience across the income distribution, with a larger impact on lower income households that spend a greater share of their income on energy and other essential items,” it said. “Although these price rises are unlikely to significantly affect the ability of mortgagors to make debt repayments, they will increase the pressure on household balance sheets, particularly if there is a larger than expected impact on growth.” 

That is the concern. And it is a reasonable rule of thumb that if anything is increasing particularly sharply, it should be closely monitored. Credit card debt is rising sharply. It needs to be watched.