UK credit card borrowers stay in debt for longer than previously thought, Bank of England research reveals

Some 89 per cent of the total outstanding stock of consumer debt in November 2016 was held by people who also owed debt two years earlier

Ben Chu
Economics Editor
Monday 08 January 2018 13:27 GMT
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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 to another credit card
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 to another credit card

UK credit card and personal loan borrowers tend to remain indebted for longer than the Bank of England previously thought, new research suggests.

The findings will add to already heightened concerns about the amount of unsecured debt households have been taking on in recent years.

In its Financial Stability Report from June 2017 the Bank had pointed out that the stock of consumer credit turns over much more rapidly than the stock of mortgages for house purchase.

But new research published on the Bank Underground blog, which was conducted in a partnership by the Bank with the Financial Conduct Authority, tells a different story, showing that 89 per cent of the total outstanding stock of consumer debt in November 2016 was held by people who also owed debt two years earlier.

“We find that 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 authors said.

The researchers said that the implication of these findings is that regulators should not be reassured when they observe rapid repayments of debt on specific credit products at particular lenders, since often the borrower would merely be shifting the debt to another provider.

In debt for longer...

Bank Underground

The saving ratio of the UK household sector – the difference between aggregate income and spending – fell to 5.2 per cent in the third quarter of 2017, the second lowest level in 20 years, strengthening fears over the extent to which personal borrowing is driving GDP growth.

However, there have been tentative signs of a slowdown in unsecured UK household borrowing.

Last week the Bank of England reported that the rate of UK consumer borrowing continued to slow in November.

Consumer credit was up 9.1 per cent on the same month a year earlier, down from a peak rate of 10.9 per cent in November 2016 and the slowest expansion since December 2015.

History of the interest rate

The latest research also suggests that consumer credit growth has not been driven lately by “subprime borrowers” (people with weak credit scores who are historically much more likely to default), which will be something of a relief to policymakers.

Rather than using aggregate consumer credit data collected from lending firms, the Bank’s researchers this time analysed data on a sample of individual borrowers from information supplied by credit reference agencies.

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