Britons stop buying and start repaying debt at a record rate

Published on Monday 30 November 2009 21:54

CONSUMERS are repaying their debts at a record rate, according to the latest data from the Bank of England.

Figures released yesterday show that the level of consumer credit fell by 579 million in October – the biggest fall since records began in April 1993.

After a decade of easy credit and rising personal debt, Britons are now choosing to repay their debts rather than accumulate new ones – but economists warn that the slowdown in spending will not help the economy.

Outstanding consumer credit contracted by 579m last month, the fourth successive decline. The contraction was almost three times bigger than economists had expected and well over September's 299m net repayment.

Before the level of credit started to fall in July, credit levels had risen almost every month since the figures were first recorded in 1993. The exception was the first month, April 1993, at the tail-end of the 1990s recession.

Since July, consumers have repaid more than 1.3 billion of unsecured debt as tight lending criteria have limited households' ability to borrow more, despite government exhortations to banks to ease up credit.

Howard Archer, chief economist at Global Insight, said: "In the long term it is probably a good thing because consumer debt levels are a major concern and consumers need to get their personal finance into better shape.

"The problem is the economy is battling to get out of recession and it needs consumer spending to get it out."

Alan Adam a financial consultant from Alan Steel Asset Management, said: "We are definitely saying to people they should get their house in order – you have got to be in control of your own finances.

"Interest rates are lower than they have ever been but people are being increasingly prudent – which is not what the government were hoping would happen."

The Bank of England showed that credit card lending actually increased by 100m but that loans and personal overdrafts fell by 700m.

The latest figures show that the annual growth rate of consumer credit fell by 0.1 per cent, while the rate for the last three months fell by 2.2 per cent.

Hetal Mehta, a senior economic advisor to the Ernst and Young Item Club, said the figures suggested banks were increasingly reluctant to lend.

"There will be a number of people who would like to borrow but who are being turned away from banks. But without a strong upturn in lending we do not expect to see a strong recovery in either the housing market or the general economy."

The UK Cards Association said there was a tendency for more people to use their debit cards – with people three times as likely to use their debit cards for a transaction as they were a credit card during the three months to the end of September.

Overall, debit cards were used 1.5 billion times during the period, while credit and charge cards were used just 500 million times.

Net mortgage lending, however, continued to rise, increasing by 922m. That was roughly in line with expectations and follows a similar 898m increase in September but is a tiny fraction of the volumes in the boom years up to mid-2007.

Mortgage approvals also rose in line with expectations to 57,345 in October after a 56,205 rise the previous month. That was the highest since March 2008, but is well below average levels of around 85,000 a month during the years of rapid house price rises.