Credit card spending at dangerous levels?
It seems we’re becoming victims of our own savvyness when it comes to credit cards. Business analysts Moody’s have produced a report that suggests UK households are risking a “personal debt crisis” in relation to the affordability of their credit card repayments. The problem? We’re all taking advantage of the glut of lengthy interest-free credit cards but we’re just switching credit cards instead of paying off balances.
Interest rates have held at their record low of 0.5% for the past six years. This, coupled with zero inflation, has meant things are cheaper to buy and that borrowing costs next to nothing.
Moody's found that at the beginning of 2013, the best balance transfer offers provided a two-year interest-free period, whereas the current best offers allow for three years of interest-free credit. But instead of using this interest-free period to reduce their debt, paying more off while there is no interest charge, it appears UK householders have learned nothing from the last crisis and are instead loading up their credit cards while the sun shines, with no contingency plans for affording repayments once interest rates rise again in the future.
Moody’s latest report - Rising Consumer Debt Is Increasing Risk in UK Credit Card Pools - found that unsecured lending has jumped 7% since December 2012, showing that people are doing the opposite of the Bank of England’s advice to start "managing their finances" in expectation of interest rates rising.
"Consumer spending has surpassed pre-crisis levels, at a time when growth in unsecured consumer debt is outstripping wage growth," Greg O'Reilly, an analyst at Moody's, said.
"Low interest rates are hiding the risk to consumers, making consumer debt appear more affordable on the surface, but masking potentially negative long-term consequences…The risk is that if consumers do not repay the transferred balances before the end of the interest-free period and the debts begin to accrue interest, consumers will struggle to afford the higher levels of debt they have taken out since 2013," he finished.
Don’t say you haven’t been warned. So have you started bashing the plastic more recently or are you being sensible with you balance transfers and paying off as much as you can while rates are low?