Credit card borrowing rises at fastest rate in 17 years
UK consumers increased their credit card borrowing at the fastest annual rate in 17 years, as households sought extra financial support to counter rising living costs.
Data from the Bank of England showed that credit card borrowing rose by £740m in June, representing a 13% increase compared with the previous month – a jump that hasn’t been recorded since October 2005.
This is no doubt linked to inflation here in the UK reaching 10.1%, which is a 40-year high. Energy, food and petrol prices have all increased since the start of the year.
Sarah Coles, senior personal finance analyst, explained: “While those on higher incomes will have been able to fall back on lockdown savings, and those on the very lowest incomes will have struggled to get more credit, those in the middle are increasingly relying on credit cards to help make ends meet.
“This feels like a solution to the inflation problem in the short term, but over time is going to end up making the problem even worse.”
Fortunately, borrowing figures in the UK are still below pre-pandemic levels. Credit card borrowing currently stands at £62bn, compared to £71.9bn in February 2020. However, credit card debts have increased significantly from £54.2 billion in March 2021.
Fixed-rate savings accounts on the rise
Bank of England data also revealed growing demand for fixed-rate savings accounts, which rose to £2.8bn in July – the highest level recorded since November 2010. This compares with only £700m which went into easy access accounts, with the average account only offering interest of 0.27% versus 1.72% for a fixed-rate account.
“Savers know that inflation is here to stay, and that if they leave their money in easy access accounts, its spending power is going to be washed down the drain by inflation,” Coles said.
She pointed out that no savings account is able to beat inflation right now, but at least tying the money up in a fixed rate account gives you a better chance of protecting the value of your cash.
At the moment, shorter-term fixed rates look more attractive. The best rate over one year is 3.3%, while for two years it is just a fraction under 3.5%. This compares to the best option over five years at 3.55%.
Coles notes that this reflects the expectation that rates are set to rise over the short-term, but should drop back within a five-year period. It means that if you have cash that you don’t need for at least a year, it makes more sense to fix to a good rate without having to commit for a longer period.
Bank of England data also showed that consumers saved £4.3bn in July, up from £3bn in June. However, this still remains below the pre-pandemic average of £5.5bn.