Is Credit More Tempting than Ever?
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Is Credit More Tempting than Ever?

Clock  2 minute read

Carl Shave Carl Shave | May 23, 2017

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We live in a time when you cannot escape consumer credit. There are advertisements on the television, in newspapers, on the radio and online all trying to tempt consumers to borrow money for a huge variety of reasons. This constant exposure, along with the current record-low interest rates, is contributing to the fastest rate of consumer credit growth since 2005. Consumer credit grew by 10.9 percent in the last year alone, with higher value loans and long interest-free periods on credit cards proving difficult to resist. But the Bank of England has recently warned about the growing rate of consumer credit expansion, with interest-free credit card offers providing particular cause for concern.

3.3 million borrowers are in ‘persistent debt’

Although credit card debt still accounts for a much smaller proportion of total bank lending than mortgages, the Financial Policy Committee believes consumers are much more likely to default on credit card repayments if they are struggling financially. This is backed by the fact that UK banks had £19bn of defaults on credit card repayments last year, compared to just £12bn of defaults on mortgages. There are also 3.3 million borrowers in ‘persistent debt’, which is more than ever before. This is where credit repayments only go towards paying the interest and charges, rather than reducing the capital amount.

Lenders need to do more

According to the Office of National Statistics, borrowing on credit cards is the most common form of non-mortgage debt, with more than a quarter of all households carrying over an outstanding balance from one month to the next. This has pushed total credit card debt in the UK to record levels of £67.3bn, with half of all households having more than £1,700 of credit card debt outstanding. To combat the rising levels of debt, the Financial Conduct Authority believes lenders need to do more to help borrowers who are struggling. In the most severe cases, it proposes that interest repayments and other charges should be waived. Given the record-low interest rates and current availability of credit, consumer credit levels are not set to fall anytime soon. However, given the looming Brexit talks that are bringing uncertainty to the UK economy, the risk for consumers and the economy as a whole remains high. This is something consumers should seriously consider before they reach for their credit cards.