Credit Card Borrowing is Rising at the Fastest Rate in 17 years

UK credit card borrowing has risen the most since 2005, with it currently rising at the fastest rate in 17 years. With the cost-of-living, interest rates, and energy prices consuming headlines, it is no surprise that the British public has turned to borrowing money. However, what is eye-opening, is the amount of credit card borrowing has increased. From July 2021 to July 2022, UK credit card borrowing grew at the fastest pace since 2005. A net £740 million month-on-month increase, putting it 13% higher than the year before.

Interest Rates

Recently, The Bank of England increased its interest base rate to 1.75%. This affected some credit card minimum payments and interest rates. Currently, the average interest rate on credit card borrowing rose to 21.7% in July, which is the highest since 1998.
As interest rates can depend on credit files, the most vulnerable consumers are often supplied with higher interest rates. This can be disastrous when considering they are more likely to take out credit in order to pay for essentials.

Why are people turning to credit cards?

The cost of living is becoming out of hand for many households, with inflation currently sitting at

10.1%. With Ofgem announcing that energy bills will increase a further 80% since April 2022, disposable income is reaching the bare minimum. For millions of households, they will be forced to make a decision between food and heating this winter. Martin Lewis describes the energy crisis as a ‘catastrophe’ and believes that ‘lives will be lost this winter. So, people are turning to credit cards to not only boost their credit score and spread the cost of larger purchases but also to cover essential costs. Currently, 12% of consumers are using credit cards more than usual to cope with the increased cost of living. This figure rose to 18% for ages 30-49, and 21% for renters. Paul Heywood, Chief Data and Analytics officer at Equifax UK, said: “The most vulnerable have run out of quick fixes, which is why we continue to see considerable growth in demand for credit.”

What is the consequence of increased borrowing?

The answer is simple- a debt cycle. If someone is relying on borrowed money in order to survive, they will be unable to pay back the money that they are borrowing. Then, this puts them in an extreme amount of debt, that they may then take out further credit in order to pay back. This can become a very dangerous cycle if not properly monitored and prevented.
What about higher-earning households?

In June 2022, £2.6 billion was deposited into banks and building societies in the UK. However, in July 2022, this figure increase substantially to £4.3 billion. This indicates that better-off households are beginning to put more money into their savings accounts in order to protect themselves from increasing inflation. So, even those who are not classed as vulnerable are taking extra precautions due to the cost-of-living crisis.

How to help?

Joanna Elson, CEO of Money Advice Trust suggested that consumers now require targeted help. She reports that today’s figures are “a further sign of the relentless pressure that household finances are under,”.
Addressing increased borrowing, she said “For many households, however, options are already running out, with more turning to credit to cover essential needs. And for those who are already in difficulty, the situation is only set to get worse without intervention.”
To support the most vulnerable from falling into a debt cycle, creditors must apply sufficient affordability assessments to any consumers asking for credit. For example, a tool that is able to tell you if someone is able to pay the repayment plans comfortably. Therefore, only those who are able to comfortably pay back debt are then offered credit. This prevents them from falling into a debt cycle. For those customers who can no longer afford their repayments, a tool should be introduced to assess what they can afford. Ideally using SFS-compliant data.
This tool is IE Hub.

For more information about how you can prevent your customers from falling into a debt cycle, click here.