(For more future updates, kindly subscribe to this blog's feeds via RSS reader or via e-mail.)

After a few months of financial sanity where it looked like the lessons of the past two years had been learnt by the teeming mass of the British public, we are now back to the same old irresponsible ways of the past.

It has been revealed this week that new borrowing on credit cards, loans and overdrafts has outstripped the amount being paid back by UK consumers for the first time since June.

Unsecured consumer credit rose £52m in December, driven by credit card borrowing according to figures from the Bank of England.

The trend during the downturn has been for consumers to pay off debts, often instead of saving when interest rates are so low. For five consecutive months, repayments outstripped new unsecured consumer credit. However, in December, the trend reversed, the Bank of England’s figures show.

This was primarily the result of borrowing on credit cards, which rose by £195m. Demand for cash advance loans and overdrafts remained low, with repayments outstripping new borrowing by £143m.

An analyst at Ernst and Young has been quoted as saying that ‘the small increase in consumer credit is likely to be connected to consumers bringing forward purchases to avoid the VAT increase and a relapse is likely next month’ and Christmas spending is also likely to be a factor.

Total net lending to individuals rose by £1.2bn in December, double the average of the previous six months, although the vast majority of lending is in the form of mortgages.

There were 1,022 fewer mortgages approved for house purchases in December compared with November, although this marked a typical seasonal drop. However, it was the first drop in approvals since November 2008 and many commentators argue that the housing market will remain relatively static in 2010.

The number of people remortgaging rose slightly to 27,276 but this is still a traditionally low level as people chose to benefit from low interest rates by staying on their mortgage provider’s variable rate when their fixed-rate deal came to an end.

The Bank rate is widely expected to remain at record lows for some months.

Low rates have put increased pressure on building societies because of their traditional business model of attracting savers to fund mortgage lending.

There was a further withdrawal of £400m by customers in December, the Building Societies Association (BSA) said, as people searched for better returns elsewhere, spent their savings on Christmas gifts or paid back debts.

December is traditionally a slow month for savings as consumers make additional purchases for the Christmas period, and, of course, the return of VAT to 17.5% at the end of the year provided a further incentive to spend. However, as a general picture of the financial behaviour of the UK population, the move away from saving to spending on credit and payday advance loans is not welcome.

Cash Advance

(For more future updates, kindly subscribe to this blog's feeds via RSS reader or via e-mail.)

Amongst a more general picture of economic health that emerged last week there was a piece of particularly good news for the UK credit market.

The Bank of England (BoE) Trends in Lending report has claimed that lenders overestimated the number of people who would default on unsecured credit such as credit cards and loans over the most recent period.

Lenders reported that default rates on unsecured credit fell in the last three months of 2009, contrary to their expectations of an increase. The increase had been expected because of the supposedly increasing rate of unemployment and the increasing financial pressures associated with the Christmas period.

The good news was tempered, however, since the amount lost through defaults rose during the same period. This means that although fewer people were defaulting on their debts, those who were defaulting owed greater amounts of money.

Consequently, the cost of interest on credit card borrowing rose.

The margin between the Bank rate and the interest rate on credit cards is much wider than a year ago owing to the heightened credit risk, but the difference remained relatively static on personal loans, the report said.

Lenders have been stricter in who they lend money to as a result of the economic downturn.
However, default numbers were lower than expected because they thought unemployment would be worse than it has proved to be.

The number of people out of work in the UK saw a surprise fall in the three months to November.

In addition, and showing that lessons have been learnt from the credit crunch, consumers have been keen to pay off their unsecured credit bills, and lenders told the Bank that they expected this trend to continue.

The combined good news from this is that people are not only defaulting on their debts in fewer numbers, but they are also making more of an effort to pay those debts down. This makes good sense and gives hope that, as a nation, we will move on from the credit crunch with more skill at sound financial management.

That people with larger loans are still defaulting is bad news, but not unexpected, since we know that the longer term consequences of the credit crunch are still being felt. Perhaps theirs is an example to us all about how not to proceed when economic prosperity returns.

Cash Advance