Debt falls for first time
The amount of personal debt in the UK has fallen for the first time since records began, in a sign that the credit crunch is changing people’s borrowing habits.
Official figures show the amount of money borrowed by consumers fell by £600 million during July, the first time lending levels have fallen since records began in 1993. The total amount of outstanding personal debt is now £1.457 trillion.
For mortgages, July saw repayments top borrowing by £400 million reflecting the number of households making the most of low interest rates to pay off their loans.
But Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, says: “Significantly, the mortgage repayments increased to their highest level in July since March implying that existing funds are being recycled rather than new monies being added to the mortgage market.”
The Bank of England, which produced the figures, also reports that the number of mortgages approved in July rose again to over 50,123.
Katie Tucker, technical manager at broker Mortgageforce, says this is a positive sign for the housing market. "Revived mortgage lending is absolutely pivotal to the recovery of the UK property market, so this increased mortgage activity is very good news,” she adds.
Consumer credit, which includes loans and hire purchase agreements, had the biggest influence on the fall in personal debt, dropping by £300 million during July. However, this is offset by a £100 million increase in credit card borrowing.
Peter Harrison, head of credit cards at moneysupermarket.com, believes the increase in credit card debt could indicate a rise in people making purchases using 0% deals. This, he says, is preferable to people taking out expensive personal loans: “If you have a good credit history there are some excellent deals, particularly on credit cards."
According to debt charity Credit Action, the total level of personal debt means that every UK adult owes £30,188 including mortgages. This is 130% of average earnings.
However, interest payments mean the true cost of this debt is higher. The charity says that interest repayments on personal debt were £65.9 billon in the last 12 months, with the average amount paid by households approximately £2,637 each year.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.