A surge in credit card borrowing to a record high last month has prompted concerns that low-income households are turning to expensive forms of lending to cope with rising costs of food, clothing and fuel.
Figures from the Bank of England showed credit card borrowing jumped by £1.5bn in February to £59.5bn – the highest since records began in 1993 – pushing the total amount of unsecured lending up by 90% on the prior month to £1.9bn.
The central bank said the rise pushed the annual growth rate for all forms of unsecured credit from 3.2% to a two-year high of 4.4%, raising the total outstanding balance of consumer credit to £199.5bn.
With shoppers turning to cheaper supermarkets such as Lidl and Aldi to make ends meet and increasing numbers of families saying they are being forced to choose between eating and heating, anti-poverty charities said it was worrying that consumers were spending more on credit cards.
Joanna Elson, the chief executive of the Money Advice Trust, the charity that runs National Debtline and Business Debtline, said the figures provide “an indicator of the underlying challenges households face in meeting the growing cost of living” as she called on the chancellor to provide more targeted help for hard-pressed households.
“Our concern is that more people will be pushed to credit to cover rising bills, which could be storing up problems further down the line when repayments are due,” she said.
Liberal Democrat Treasury spokesperson Christine Jardine said it was unsurprising that households were turning to credit cards when the government was adding to “real-terms cuts to household incomes with its stealth taxes and its failures on pensions and benefits”.
She said: “More and more people will have no choice but to turn to credit cards, massively increasing their long-term costs, just to make ends meet.”
Some economists said it was possible the increase in credit card spending, which followed the lifting of restrictions related to the Omicron variant, showed a renewed confidence among consumers before Russia’s invasion of Ukraine.
Paul Dales, the chief UK economist at the consultancy Capital Economics, said: “It is more likely that households had the confidence to borrow and spend a bit more and/or were willing to use borrowing/savings to smooth their spending.”
However, Samuel Tombs, the chief economist at the consultancy Pantheon Macroeconomics, said separate figures showing a collapse in consumer confidence between January and March, and a sharp slowing of mortgage lending, pointed to caution among most households.
“The big rise in consumer borrowing in February – the largest since April 2018 – likely reflects households attempting to maintain their consumption at a time when real disposable income is falling sharply, rather than them going on a spending spree,” he said.
Bank figures also showed that consumers were supported in their efforts to borrow by lower loan rates in February, despite an increase in the central bank’s base rate from 0.1% to 0.5% between December and February. Credit card interest rates averaged 18.26%, down 0.29 percentage points, while standard credit loans fell to 6.14% from 6.23%.
Intense competition among mortgage lenders meant the increase in the base rate hardly altered the average fixed-rate offering, which increased from 1.58% to 1.59%.
Tombs added that the value of “excess savings” edged higher to £186.0bn, from £185.7bn in January, showing that households were unwilling to run down their savings while the economic outlook was uncertain.
The Treasury’s independent forecaster, the Office for Budget Responsibility, has predicted that the UK’s economic growth will be sustained this year and next by consumers spending much of their accumulated savings.
Tombs said the stock of unsecured credit last month was “a hefty £26bn below its pre-Covid peak”, so households without savings should be able to ramp up their borrowing further.
“We continue to think, therefore, that the economy will narrowly avoid sliding into recession this year, despite the grim outlook for households’ real incomes,” he added.