Irresponsibility returns to the UK credit market
February 3rd, 2010
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.
