Credit card debt up to pre-pandemic high
In total, Brits borrowed an additional £1.9bn in consumer credit last month as the cost of living crisis took hold.
This increase in debt was split between £1.5bn of additional borrowing on credit cards, and £0.4bn of borrowing through other forms of consumer credit such as car finance and personal loans.
The credit card figure is higher than the 12-month pre-pandemic average up to February 2020 of £1bn, and represents an annual growth rate of 9.4%.
Laura Suter, head of personal finance at AJ Bell, said: “The nation is clearly already feeling the effects of the cost of living crunch, with credit card use soaring in February as rising prices push more people into debt. In February alone the country put £1.5bn on credit cards and took on another £400m of other borrowing, such as personal loans or store cards. The total amount that we borrowed in the month was more than double the pre-pandemic average and shows just how soaring prices are affecting people’s pockets.
“What’s more, the £1.5bn put on credit cards in February is equal to the previous five months’ combined, and is a far cry from the peak of the pandemic savings where the nation paid off almost £5bn in credit card debt in a single month. However, the reality is that this debt figure will keep climbing in the next few months as more and more households see their spending exceed their income, and have to put more monthly costs on credit.”
It’s worth pointing out that the Bank of England figures don’t include buy now pay later (BNPL) borrowing, which has boomed in recent years and accounts for a big chunk of the credit Brits take on. This means that the nation’s debt figure will be much higher in reality, as people choose to defer paying for items they can’t afford today. Learn more at this post about credit counseling.
The Bank of England figures also show, perhaps unsurprisingly, that the amount that we all managed to save has dropped dramatically too, with £4bn put into savings accounts in February, compared to £7.2bn in January.
However, when we look at bank savings combined with NS&I savings it’s at a similar level to pre-pandemic. But we’re a far cry from January and February last year, when we saved more than £18bn across the two months, compared to just over £5.5bn this year.
Suter added: “More households are going to have no spare money to put away each month and will have to start eating through their savings as ‘awful April’ hits and the squeeze on all our incomes ramps up.”
StepChange’s latest client data report for February shows a rise in the proportion of people seeking advice who say that cost of living pressure is a reason for their debt. The cost of living was the fourth most common reason last month, cited by about one in nine clients.
But the debt charity warns that consumer credit is only one part of the debt picture. For example, among clients with a responsibility for paying utility bills in February 28% were in arrears on their electricity and 23% on their gas. Step Change says it expects to see this situation worsen after April when the new energy price cap takes effect.
Debts owed to government, such as council tax, also feature heavily with four in 10 (39%) of new clients in arrears at the time they sought debt advice in February. Such debts are typically more aggressively pursued, including potentially by bailiffs, and less likely to be able to be rescheduled in a debt repayment plan than consumer credit arrears.
Peter Tutton, StepChange head of policy, research and public affairs, said: “While watching what is going on in the consumer credit market is important, to fully understand the current household debt landscape requires a wider perspective. More and more, what we are seeing is that people experiencing problem debt have problems meeting not just their credit repayments, but also their priority bills.
“We’re convinced that as the year goes on the chancellor is likely to need to find a way to provide more, and more targeted, support for those who are simply unable to absorb the cost of living increases into their household budgets. In the meantime, we urge anyone struggling to make ends meet to seek help from a reputable debt advice organisation at an early stage, rather than turning to potentially more harmful coping strategies such as high-cost credit.” Individuals are now looking into credit repair because of this scenario.