Card debt surge at 17 year high, and fixed rate savings flood: Bank of England

Credit card borrowing is up 13% in a year – the fastest rate of growth for 17 years (since October 2005). Savings into fixed-rate accounts rose to £2.8 billion in July – the highest since November 2010 – while only £700 million went into easy access accounts paying interest. The average new fixed rate was 1.72% – up from 1.58% in June, and the average easy access rate was up 0.06 percentage points to 0.27%.

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

It also issued its money and credit report for July: Money and Credit – July 2022 | Bank of England

Sarah Coles, senior personal finance analyst, Hargreaves Lansdown: “Credit card borrowing has grown at its fastest rate for 17 years. Runaway price rises have forced more of us to turn to credit, and there’s a real risk that more borrowing is on the cards.

The summer is always a particularly expensive time of year, but the surge in borrowing should ring alarm bells. The growth of credit card debt has accelerated as inflation has taken hold. While those on higher incomes will have been able to fall back on lockdown savings, and those on the very lowest incomes will have struggled to get more credit, those in the middle are increasingly relying on credit cards to help make ends meet. This feels like a solution to the inflation problem in the short term, but over time is going to end up making the problem even worse.

It’s worth noting that outstanding borrowing is still below where it was at the start of the pandemic. We currently have £62 billion of borrowing sitting on our cards, compared to £71.9 billion in February 2020. However, card debts have climbed significantly from the pandemic low point in March 2021 (£54.2 billion), and there’s every chance the pace of borrowing is going to build as times get even tougher.”

Fixed-rate savings flood

“There has been a flood of cash into fixed rate savings. Savers know that inflation is here to stay, and that if they leave their money in easy access accounts, its spending power is going to be washed down the drain by inflation. It means canny savers have powered a steady flow into fixed rate savings accounts.

This reflects the way money has moved into HL Active Savings, where savers have been fixing their cash in return for a better rate, to make the most of the money they expect to need within the next five years.

However, easy access accounts still dominate the overall savings market. And while it’s the right home for your emergency savings safety net of 3-6 months’ worth of essential expenses, it’s far less rewarding for money you won’t need for at least a year. While no savings account can beat inflation at the moment, tying the money up in a fixed rate account for a specific period will give you a higher interest rate, and do a better job of protecting the value of your cash.

At the moment, shorter-term fixed rates are particularly striking. The best rate over one year is offering 3.3%, while the best over two years is just a fraction under 3.5% – compared to the best over five years of 3.55%. It reflects the fact that the swaps market expects rates to rise for now, but drop back within the five year period. It means that anyone with cash they won’t need for at least a year could fix for a better rate, without having to commit to it for a longer period. This is going to appeal particularly at a time when everyone is so unsure about what the future holds.”

Other statistics from the report

  • We saved another £4.3 billion (plus £300 million in NS&I). The combined £4.6 billion was up from £3 billion in June but still below the pre-pandemic average of £5.5 billion.
  • We borrowed another £1.4 billion in consumer credit, including £700 million on credit cards – above the pre-pandemic average of £1 billion.
  • The annual growth rate for all consumer credit (which excludes mortgages) hit 6.9%.
  • New mortgage rates rose 0.18 percentage points to 2.33% over the month, to their highest in six years.
  • We borrowed slightly less in mortgages (net) – £5.1 billion – but that’s still above the pre-pandemic annual average of £4.3 billion.
  • Approvals for mortgages for house purchases rose slightly to 63,800, but that’s still below the pre-pandemic average of 66,800.