Consumers keep borrowing, but Bank of England is worried

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Credit growth slowed in May and affordability levels are still under control, but the Bank of England is looking at ways to slow down bank lending.

Figures from the British Banking Association (BBA) show consumer credit growth up 5.1% in May, compared with 6.4% in the previous month. Eric Leenders, BBA managing director for retail banking said: “This month’s figures show that in the run up to the General Election, credit growth in personal loans, cards and overdrafts has slowed, which was reflected in lower spending; with increased household costs affecting growth in deposits and saving.”

At the same time, the latest Wealth & Assets Survey from the Office for National Statistics (ONS) shows that while household debt may be increasing, Brits are finding it easier to pay their bills.

It found that in the second half of 2016, 63% of borrowers said they were keeping up with their credit commitments without any difficulties compared with 59% in the previous two years. The percentage of adults who did not consider their non-mortgage debt to be a problem at all increased from 70% in July 2014 to June 2016 to 73% in July 2016 to December 2016.

However, the Bank of England is still concerned. It plans to force banks to find a further £11.4bn in the next 18 months to protect against the risk that borrowers can’t keep up their repayments.

The Bank’s Financial Policy Committee (FPC) said lenders were placing too much weight on recent performance of loans in benign conditions and needed to have more security should economic conditions worsen.

Do you have too much debt?

1) Calculate your debt to income ratio

Your debts will include mortgage/rent, minimum payments on your credit cards, car loans, student loans, child support payments and personal loans.

Your income will include your salary, any income from investments, child support and rental income.

Divide your income by your debt repayment – for example – if your debt repayment is £1,000 and your income £4,000, your debt to income ratio would be 1,000/4,000=25%.

As a rule of thumb, anything under 36% is considered healthy, while anything over 50% is considered ‘distressed’.

2) Pay down your most expensive debt first

There are plenty of cheap borrowing options, from low rate credit cards to personal loans. If you are paying more than 10% on any of your debt, you need to look at whether you can get a better rate.

3) Stop borrowing

If your debt is already high, don’t borrow any more even if lenders are willing. You could end up in trouble with the bailiffs.

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