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Savings hit one-year high and borrowing falls as interest rates rise

Savings hit one-year high and borrowing falls as interest rates rise
Emma Lunn
Written By:
Emma Lunn

Household bank deposit hit their highest level since November 2022 while credit borrowing fell to £1.3bn in October from £1.4bn in September, according to the Bank of England Money and Credit report.

The latest data, for October 2023, shows that the figures were driven by decreased net borrowing through credit cards, from £0.6bn in September to £0.5bn in October.

Net borrowing through other forms of consumer credit (such as car dealership finance and personal loans) remained stable at £0.8bn during the same period.

The annual growth rate for all consumer credit continued to increase, and is now at 8.1% in October, the highest since October 2018.

This was driven by a rise in the annual growth rate for other forms of consumer credit from 6% in September to 6.3% in October (the highest since February 2020), while the growth rate for credit card borrowing decreased slightly from 12.5% to 12.4% over the same period.

Interest rates up on overdrafts and credit cards

The average interest rate on interest-charging overdrafts increased by 3 basis points to 22.52% in October, while the effective rate on interest bearing credit cards increased by 16 basis points to 21.05%.

However, the average interest charged on new personal loans saw a 2 basis point decrease, and now sits at 8.71%.

Alice Haine, personal finance analyst at Bestinvest, said: “Consumers borrowing fell to £1.3bn in October, down from September’s £1.4bn – a sign consumers are reining in expenditure to avoid taking on expensive debt or benefitting from generous pay rises that help to balance the books.

“Using credit to fund everyday living costs is far from ideal considering the effective rates on overdrafts and interest-bearing credit cards are still on the rise, but with Christmas around the corner, households may have little choice if they want to meet all the costs that come with the festive period.

“While borrowing on credit cards declined in October, for short-term borrowing needs, a credit card can be a useful tool to get people through a temporary period of high expense. Ideally, the outstanding balance should be cleared at the end of every month to avoid heavy interest charges.”

Brits saving more

The Money and Credit report also found that households deposited, on net, £4.6bn with banks and building societies in October, the highest since November 2022 (£4.8bn).

This was driven by net inflows to interest-bearing time deposits of £4bn, following inflows of £5bn in September. These were partly offset by net outflows from non-interest bearing sight deposit accounts amounting to £1.7bn in October, following net outflows of £2bn in September. There were zero net flows of interest-bearing sight deposits in October, which followed net outflows of £6.2bn in September, and 12 months of consecutive net withdrawals from these accounts.

Households’ net deposit flows into National Savings and Investment (NS&I) decreased to £2.2bn in October, following net deposits of £7.7bn in September.

The Bank of England pointed out that deposits into NS&I accounts are not captured within households’ deposits with banks and building societies, but can act as a substitute for them.

The combined seasonally adjusted net flow of both household deposits with banks and building societies and NS&I accounts saw a decrease from £7bn in September to £6.8bn in October, and remained above the average monthly net flow of £1.7bn during the previous six months.

The effective interest rate paid on individuals’ new deposits with banks and building societies rose by 6 basis points and now sits at 5.27%.

Haine said: “Inflation has eased significantly, dropping to 4.6% in the 12 months to October from a high of 11.1% in October last year, delivering a real return on nest eggs for those with the top savings rates in the run-up to Christmas. The effective interest rate – the actual interest paid on new fixed accounts – rose by 6 basis points to 5.27% in October but the picture is likely to change in the coming months.

“While savings rates have ramped up over the course of this year, expectations that the base rate has peaked mean the best deals won’t stick around for long, which is why anyone with money sitting idle in an account with an ultra-low rate should act fast. Many savers are taking action with £4.6bn deposited with banks and building societies in October – the highest amount since November 2022.”