- As rising cost of living squeezes household incomes, consumers turn to credit cards to fund spending
- What does this mean for the wider economy?
Credit card borrowing is on the rise. According to the latest Bank of England Money and credit report, consumers borrowed an additional £1 billion from their credit cards in June. This equates to an annual growth rate of 12.5% - the biggest increase since the heady days before the 2005 financial crisis.
In the short term, borrowing by credit card could help households get through the harsh winter without significantly altering their spending. Mark Haefele, chief investment officer at UBS, argues that “in this scenario, reducing saving (or increasing borrowing) will fund consumption until real income growth ceases to be a drag on growth. the consumption”. But it won’t be a miracle solution. Nicholas Farrdeputy economist at Capital Economics, predicts that “households will probably only be able to mitigate part of the downward impact on their real spending”.
It’s also unclear what kinds of expenses consumers will be willing to finance with credit cards. Pantheon Macro economists say last month’s release provided “the first compelling evidence that households are willing to save less and borrow more in order to defend their current level of real spending.” But dig a little deeper, and consumer spending habits seem more nuanced. The EY Item Club expects households to cut spending on major purchases to ensure they can afford essential items. As the chart shows, debit and credit card spending in the “delayed” and “social” categories is returning to pre-pandemic levels. If this trend continues, cost-of-living compression will offset the ‘revenge spending‘ we saw this when the pandemic restrictions were initially lifted.
There will also be an uneven distribution of borrowing. Households that can reduce their savings will do so; those who cannot will turn to borrowing instead. Pantheon Macro emphasizes the “unequal distribution of savings across income groups”, and The Resolution Foundation found that almost half of all households have less than a month’s savings, while 4% of families have no savings. Its August research found that 32% of families without savings rely on friends and family for unexpected expenses, compared to just 3% of those with savings.
But think tank economist Molly Broome says ‘there is no guarantee they will be able to provide support as rising energy bills affect almost every household during the winter. difficult winter ahead”. If that safety net is put to the test, credit card borrowing will likely be a last resort.
There is also the broader question of what higher levels of consumer credit mean for the economy – particularly in a time of interest rate. After years of ultra-low interest rates, households have become accustomed to allocating a very limited amount of income to interest payments. But credit card rates increase to 18.56% in June, and the 50 basis point rise in the base rate in August should precipitate another rise. As the Bank of England continues to raise borrowing costs, the impact will begin to be felt more and more.
The next Money and Credit report on August 30 will give an indication of the increase in credit card borrowing, but it will take a few months to get an idea of the consequences.