Photographer: Matthew Lloyd/Bloomberg

Those U.K. Credit Card Bills May Be a Problem Waiting to Bite


The pace of consumer borrowing may raise a few eyebrows at the Bank of England if it keeps rising unchecked.

Unsecured lending — such as on credit cards — jumped an annual 9.1 percent in January, the fastest in a decade, according to data on Monday. In total, consumers took out 1.6 billion pounds ($2.2 billion) more than they repaid, the second-highest since mid-2005. Back then, the country was in its 14th year of uninterrupted growth, and we're nowhere near that now.

While Mark Carney has said U.K. spending is being largely fueled by incomes, he and his fellow policy makers are still a little wary of where the borrowing numbers are going. Here's the BOE governor earlier this month.

“ They are still relatively indebted, and we want to make sure that, the collective, we do not repeat the mistakes of the past of getting too indebted and then getting shocked - shocked - by movements on rates.'' 

With record employment and cheap money encouraging borrowing — the average rate on a new unsecured loan is at a three-year low — that’s good for Britain's economy at a time of deepening troubles in the world economy and questions over business investment in the run-up to the European Union referendum. But it means the foundations of the expansion are not as solid as they could be.

“While the rapid growth in unsecured lending will support growth in the near term by propping up consumer spending, it could pose a risk to financial stability further down the line,” said Niraj Shah, an economist at Bloomberg Intelligence in London.

The BOE's Financial Policy Committee will no doubt consider the matter when it gathers on March 23 for its quarterly meeting. While unsecured borrowing is dwarfed by the amount people borrow against their homes, its pace of expansion was enough for one FPC member to include it in a warning last week about stability threats.

“There may not be a great deal of room for growth in this area if we want to avoid vulnerabilities building up in the economy.”

BOE Deputy Governor for Financial Stability Jon Cunliffe

Investors and economists don't anticipate a rise in benchmark borrowing costs for some time. Indeed, if forward contracts are to be believed, rates are going nowhere for the next three years and there is even the possibility of a cut. Still, that's no reason for households to let exuberance take over.

“It is important that consumers do not become increasingly tempted to take on excessive debt and also that bank lending standards do not slip,” said Howard Archer, chief economist at IHS in London. “Consumers need to allow for the fact that interest rates will eventually rise.”


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