Totally addicted to debt: households are borrowing like it’s 2007
Joe Wright, 7 January 2015
Learning from history has not been mankind’s greatest talent, no matter how recent the history. The Bank of England released figures today on consumer credit which show British families have returned to 2007 levels of credit card debt. This marks the fastest growth in personal loans since just before the credit crunch according to the Bank of England’s consumer credit survey. November alone saw £1.25billion of credit cards, loans and overdrafts taken out.
The reasons for last quarter’s credit boom were increased demand, more marketing of products, better interest rates and more generous credit scoring, but it is difficult to understand the balance between these factors. The wide gap between price inflation and wages, now beginning to narrow, has meant families are struggling to pay everyday costs and are more likely to use credit to kick payments down the road. The Citizens Advice Bureau consistently reports credit card debt as the second biggest problem for which people contact them for help. The run up to Christmas typically drives people to spend well above normal.
The banks have responded in kind by competing for debt with some of the best deals offered since the credit crunch – in some cases unprecedented deals, such as the Lloyd’s and Halifax’s 34 month interest free cards on balance transfers (with a percentage charged on the amount moved).
However the Bank of England report explains an important factor was the banks’ judgements that people were far more able to pay debt back – the number of credit card defaults “fell significantly” last quarter. But as was discovered in 2007, these judgments typically allowed little flexibility with the future circumstances of households’ ability to pay.
Incidentally this judgement on consumer credit was released alongside evidence of the Bank of England’s response during the financial crash. Minutes from the Bank’s board and oversight committee revealed there was no plan in the event of a run on a bank, or any real understanding of the magnitude of the crisis even during the run on Northern Rock. Foresight is not their strongest attribute.
The Financial Conduct Authority has expressed some hard intent to crack down on bad credit card deals, referring to the extremes of the industry as “payday loans with plastic”. They will launch an investigation into the £150 billion credit card market in the coming months. Government support, however, will be crucial for whatever the FCA proposes. Past success with payday lenders was built on the back of political unity around the misconduct of the lenders; they were an easy target because of their poor reputation and smaller influence. It is difficult to see the FCA managing anything like the same success with a market as large and important to the banks as credit cards.
The motivation to create higher bench marks for consumer credit, other than demand, is somewhat moot in the face of rising economic growth. It is no coincidence that rising household expenditure, debt, and GDP are all the strongest they have been in years. Why upset the apple cart?