Astonishing hike in credit card borrowing, as savings slump and mortgages slow: Bank of England

We borrowed another £1.5 billion on credit cards in February, the biggest monthly hike in at least 30 years. It took the annual rise in card borrowing to 9.4%. Consumer credit overall was up 4.4% in a year, the biggest increase since the onset of the pandemic.

The Bank of England reported on effective interest rates for February: Effective interest rates – February 2022 | Bank of England

The Bank of England issued its credit report for February: Money and Credit – February 2022 | Bank of England

Sarah Coles, senior personal finance analyst, Hargreaves Lansdown: “Price hikes took a horrible toll in February, as we borrowed an astonishing £1.5 billion on credit cards during the month. This is the biggest monthly hike in card borrowing in at least 30 years.  After a year of repaying debts, followed by a year of modest increases in borrowing, this was an eye-watering increase, and could be a worrying sign of things to come.

Overall, we borrowed another £1.9 billion in consumer credit – the most since the onset of the pandemic, and almost double the average in the year running up to the crisis (£1 billion).

And while overall we continued to save, behind these figures will be people who have eaten their way through their lockdown savings, and faced with alarming price rises across the board, they’re turning to credit cards. Enormous numbers of people have cut their costs as much as they feel able to, and are still spending more than they earn. Credit cards feel like a solution in the short term, but when you’re having to pay interest on your debts, it makes it even harder to make ends meet.

At times of high inflation, the risk is that this pattern will grow. Not only do prices rise even further, but people who need to make a big purchase worry that by putting it off, it’ll just get even more expensive. As a result, they end up borrowing to buy now, and adding to the pile of debt.

There are no easy answers at a time like this, but borrowing is a particularly dangerous one. We all need to go back to our budgets, consider more drastic steps to cut costs, and if we still can’t find a way to pay the bills, seek help from a charity like Citizens Advice or StepChange.”

Mortgages slow as buyers get cold feet

  • We borrowed another £4.7 billion in mortgages in February, down from £5.9 billion in January.
  • Mortgage approvals for the coming months also fell from 73,800 to 71,000.
  • Both are still above pre-pandemic levels.
  • Remortgaging approvals were at their highest since the onset of the pandemic.
  • The rate on new mortgages has only risen 0.1 percentage point to 1.59%.

“The squeeze is starting to be felt in the mortgage market, as enthusiastic buyers start to get cold feet about stretching their finances at the moment. Mortgages borrowing, and loans approved for the coming months fell back during the month, although they still remain robustly above their pre-pandemic averages.

This wasn’t a reaction to rises in mortgage rates, because they’ve hardly budged at all. In February the base rate was 0.5% – up 0.4 percentage points from the bottom, but average mortgage rates had risen just 0.1 percentage point. The high street giants, still awash with lockdown savings at 0.01% had plenty of cash to loan at rock bottom rates, so there are still lots of cheap deals around.

Instead, cooling enthusiasm is more likely to be the result of runaway price rises. Our finances are getting squeezed, and we know life is going to get even more expensive in the coming months, so this has started to dent the confidence of buyers.

This is likely to have intensified during March, so the next set of figures could see the mortgage market slow again, and we could see the balance of buyers and sellers tip, so it becomes more difficult to sell again.”

New savings slump. Lockdown savings are likely to be running dry

  • The amount we saved dropped back to £4 billion, plus £1.1 billion in NS&I. This is below the £5.5 billion combined monthly average in the year before the pandemic.
  • The rate on the average new fixed rate savings account rose 0.1 percentage point to an average of 0.77%. The average easy access rate rose just 0.01 percentage point to 0.1%.
  • This is well below the rates we saw last time the Bank of England rate was 0.5%. That was back in July 2018, when new fixed rate savings offered 1.12% and easy access 0.43%.

“Savings have dipped below pre-pandemic levels, as cash-strapped families struggled to pay the bills, let alone put money aside for the future. This may well be a worrying sign of things to come, as money gets tighter.

For those who could afford to put money away, rates hardly moved, despite the Bank of England’s base rate hikes. The high street giants were keeping mortgage rates low, which meant newer competitors had to do the same, and as a result they couldn’t afford to boost their savings rates. Average rates were well below the levels they reached last time the base rate was at 0.5% – and in the case of easy access savings, they offered less than a quarter of the rate available last time.

There has been better news in the month since, and very recently we’ve seen more activity, particularly in the easy access market, as Chase Bank made a bold move to take more market share. It means we should see more meaningful movement in March and April.

If your money is still sitting in a miserable high street easy access account earning 0.01%, now really is the time to consider a move. You can make 1.5% with Chase Bank – if you’re willing to switch your current account. You can also make 1% from Zopa, without needing to change any of your other banking arrangements.”