British consumers are trapped by credit card debt for longer than previously thought, according to a study by officials at the Bank of England and the City regulator, as unsecured borrowing reaches levels unseen since the financial crisis.
Analysis by the Bank and the Financial Conduct Authority showed it was common for people to remain in debt even after paying off one of their credit cards, as they shift debts from one lender to another. Previously, Threadneedle Street had believed that credit cards were paid off more quickly, particularly in relation to mortgages.
Nine out of every £10 of outstanding credit card debt in November 2016 was owed by people who were also in the red two years earlier, according to the study.
The analysis follows the rapid growth in personal borrowing on credit cards, loans and car finance, now rising at almost five times the rate of growth in UK pay. Households are finding themselves increasingly squeezed by meagre earnings growth and rising inflation, as the weak pound after the Brexit vote pushes up the cost of imported goods.
Bank data shows personal debts have risen to the highest level since before the credit crunch, reaching more than £200bn – with credit cards accounting for more than £70bn of the total.
Households are also facing a year of stagnant real earnings growth in 2018, which may push them further into debt should they wish to maintain their living standards.
Writing on the Bank Underground blog – where Threadneedle Street staff can air their views in public – the officials said: “Although a consumer may clear their debt on one credit product, it is not uncommon for them to remain in debt as they transfer balances, take out new credit products or draw down on existing credit lines, such as credit cards.”
The Bank has become increasingly worried about the boom in personal debt over recent months, forcing banks to beef-up their financial reserves to protect against any losses. It warned against reckless lending standards emerging after a period of economic stability since the financial crisis, saying Britain’s banks could incur £30bn of losses if interest rates and unemployment rose sharply.
The study found some crumbs of comfort for the Bank, finding that the growth in consumer credit had not been driven by people with poor credit scores – known in the finance industry as “subprime” borrowers. This would help to suggest that the growth in consumer credit has been less risky than feared.
But while the proportion of borrowers with bad credit scores remained roughly the same over the two years to November 2016, officials said there should have been an improvement because of the economic recovery over the same period of time, which points to banks still being at risk from bad debts.