Spending our way to a new crisis

Rocketing personal debt risks a return to pre-2008 conditions as experts urge the financial regulator to change the credit card game.

The FCA has its sights set on credit card lenders as debt becomes increasingly unwieldy. (iStock)

You know we have a serious debt problem when the Financial Conduct Authority calls on credit card companies themselves to help struggling consumers – 3.3 million of us in fact who haven’t been able to raise our heads out of the red in months, sometimes years.

In fact, the latest figures from the Bank of England show we borrow almost 10% more on credit cards today then we did only 12 months ago.

With the rate of spending at its highest level since February 2006, and the amount outstanding now exceeding £67bn, experts warn we could be spending our way to a new recession.

Out of hand

There are certainly disturbing signs that our love affair with credit has returned to toxic levels. Around a million people increased the amount they owe on an overdraft or credit card in the last 12 months, according to data from the University of Bristol for financial services firm Momentum UK.

Another 4.5 million people have resorted to alternative credit over the same period, including high cost credit and informal loans.

Indeed, the Office for Budget Responsibility (OBR) calculates that households spent £34bn more than they earned in 2016, a figure that could soar to almost £50bn by 2021 if the rate of overspend doesn’t change.

The implications are increasingly widespread.

“Although confidence has so far remained surprisingly resilient despite the rise in inflation, this is the first real sign from the official data that cracks are appearing in consumer spending,” warned Allan Monks, an economist at JPMorgan.

Meanwhile, the Office for National Statistics this week revealed that savings rates have hit a record low as households put aside an average of just 3% of their earnings in 2016.

“We know that around eight million people across the UK are over-indebted, meaning that they’re struggling with, or worried about, their level of debt, Jake Eliot, Savings Expert at the Money Advice Service, says.

“A concerning number of people are failing to save for a rainy day too. Recent research shows that nearly 17 million working age adults across the nation have less than £100 in a savings account, meaning that too many people are one unexpected bill away from a serious financial shock.”

Predatory persuasion

But the return to crisis level borrowing isn’t simply because we can’t resist a trip to the shops.

“We’ve seen a huge rise in indebtedness in lower income households,” says Angela Clements, CEO of not-for-profit alternative lender Fair for You.

“Affordability is tight in many households to pay for essential expenditure because of the high levels of debt relative to the income of the household.

"I am particularly concerned that credit cards are being sold on the basis that they improve your credit rating if you pay the minimum amount each month. Affordability checks on unstructured credit tools of this type do not assess the applicant’s ability to repay the full amount of the credit limit.

“In households that do not manage well, they use the credit and then are stuck repaying the interest until they can't manage any longer. This is credit that traps the applicant and has all the benefit to the lender.

Zombie debt

The FCA has announced this week that they will be looking for credit card companies to help with structured repayment if the customer’s interest is higher than their repayments, but few believe it will go far enough to make a real difference to individual's circumstances.

“This is not sufficient to protect vulnerable customers. Affordability checks should ensure that if the customer uses the facility […] they can reasonably afford to repay it,” adds Clements. “It must not be sold on the basis that the lender wants the customer to just barely service the interest.”

Banking on Brexit

Until that happens, some consumers are being persuaded to cut back thanks to other pressures.

Around half of all UK households say they are planning to cut back on spending over the next twelve months, the latest Disposable Income Index from Scottish Friendly has revealed, not because of their own personal finances, but those of the nation as a whole.

Seven in ten UK households are worried about the impact rising inflation will have on their disposable household income in the next twelve months.

Around half are concerned about the financial impact of triggering Article 50 on their family’s finances and 1 in 4 are worried that leaving the EU will have an impact on their job.