Surge in consumer credit fuels debt fears

Updated
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Concerns that people are becoming increasingly tempted to go into debt to fund their spending have been raised after Bank of England lending figures showed the biggest annual jump in consumer credit seen since 2006.

The Bank's Money and Credit report for September showed annual growth of 8.2% in consumer credit, marking the strongest increase seen since February 2006.

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A total of £176.3 billion-worth of consumer credit was outstanding in September. Within consumer credit, borrowing on credit cards increased by £288 million in September and personal loan and overdraft borrowing increased by £973 million.

Howard Archer, chief UK and European economist for IHS Global Insight, said that high consumer confidence and continued low interest rates have meant that people have become more prepared to borrow in recent months.

He said: "However, there is the concern that consumers are becoming increasingly tempted to take on debt again to fund spending.

"Consumers need to allow for the fact that interest rates will likely start to rise before too long, even if the increases will be gradual and limited compared to past norms."

Mr Archer said he believes it is "more likely than not" that interest rates will start to edge up in the first half of 2016.

He said: "Hopefully, rising earnings growth, extended low inflation and high employment will ease the pressure on many households' financial positions over the coming months and reduce their need to borrow."

A separate report from the Insolvency Service showed that the rate of people going insolvent across England and Wales is at its lowest level in a decade.

One in 550 adults became insolvent in the 12 months to September, marking the lowest rate seen since 2005, the Insolvency Service said.

Mike O'Connor, chief executive of StepChange Debt Charity, said the Insolvency Service's figures do not reflect the full extent of problem debt.

He said: "More than 600,000 people contacted us for debt advice last year and insolvency was the right option for just 20% of them."

Mr O'Connor continued: "With credit markets loosening and creditors beginning to lend more freely, it is vital that we do not return to the high levels of unsustainable credit and the big boom in insolvencies we saw following the economic crisis."

Martin Beck, senior economic advisor to the EY ITEM Club, said the rise in demand for consumer credit ties in with a recent Bank of England survey of lenders, which found that borrowers are being offered more favourable terms.

He continued: "But consumer credit accounts for little more than 10% of total household debt. And despite continued very low interest rates, falling unemployment and rising real incomes, households' overall appetite to borrow still remains a long way from the pre-financial crisis norm."

The Bank's figures also showed that some 68,874 mortgages with a collective value of £11.9 billion were approved to home buyers in September, slightly down on the 70,664 home loans approved for house purchase in August.

Richard Woolhouse, chief economist at the British Bankers' Association (BBA), said: "The drop in mortgage approvals suggests that the pace of growth in the housing market is softening.

"However, overall mortgage lending continues to increase rapidly. This is being driven by remortgaging as savvy customers secure attractive deals ahead of a possible rate rise.

"Consumer confidence also remains buoyant as demonstrated by the surge in credit growth."



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