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Millions of Brits turn to debt to deal with cost-of-living crisis

Emma Lunn
Written By:
Emma Lunn

Net borrowing of consumer credit rose to £1.7bn in June, the highest amount in five years, according to the Bank of England’s Money and Credit report.

The figure is the highest net consumer credit borrowing since April 2018 (£1.9bn). Borrowing on credit cards remained stable at £0.6bn in June, while borrowing through other forms of consumer credit (such as car dealership finance and personal loans) increased significantly from £0.5bn in May to £1bn in June.

The annual growth rate in June for all consumer credit remained unchanged when compared to May, at 7.6%, while the growth rate for credit card borrowing decreased from 12.5% in May to 12% in June.

By contrast, the annual growth rate for other forms of consumer credit increased slightly to 5.7% in June, compared to 5.5% in May.

Households rely on debt for essentials

StepChange Debt Charity’s latest client data shows client volumes continue to increase year-on-year, with volumes in June 2023 11% higher than June 2022.

Richard Lane, director of external affairs at StepChange, said: “At this point in the cost-of-living crisis, there will be a significant number of households relying on credit simply to meet the cost of their everyday essentials, and with the Bank of England’s figures showing the highest level of consumer credit borrowing since 2018, we expect the knock-on effect to be more people at risk of problem debt.

“The rise in interest rates coupled with inflation will have already had a drastic impact on millions of people’s finances, with both mortgage holders and renters seeing unsustainable jumps in their household budgets. Our advisors are consistently reporting a lack of financial resilience among clients, with many struggling to manage multiple debts across consumer credit and household bills.

“We know that people showing signs of financial difficulty need help as early as possible to prevent them from becoming trapped in a spiral of harmful, unaffordable borrowing.

“The Consumer Duty, which comes into effect from today, is a chance for lenders to develop appropriate support for their customers and identify when borrowing is becoming unsustainable at the earliest possible stage.”

Uptick in fixed rate savings

The Bank of England figures show that during June, households deposited an additional £3.4bn with banks and building societies, following net withdrawals of £3.1bn in May.

This was mainly driven by net inflows of £6.6bn into interest-bearing time deposits, up from £5.1bn in May. Similarly, households’ deposits into non-interest bearing sight (easy access) accounts rose to £2.1bn in June after seven months of net withdrawals.

Net inflows into ISAs fell to £3bn in June, continuing a decline from £3.7bn in May and its recent peak of £9bn in April. These net inflows were all largely offset by net outflows in June of £8.4bn from interest-bearing sight deposit accounts, compared to net outflows of £11.4bn in May.

Kevin Brown, savings specialist at Scottish Friendly, said: “Savings are still flowing out of accounts too in order to keep up with day-to-day costs, according to the bank’s data. But long-term savings are building as those able to take advantage look for better rates.

“What we have then is a tale of two households – those struggling and those reaping the benefits of higher rates. Households using more credit to meet their spending obligations, while money is draining out of instant-access savings as those households also tap into their short-term savings to make ends meet. But those in a position to keep saving are gaining from higher rates on offer as the uptick in time deposits suggests.”