As of January 2023, a staggering £63.9 billion was outstanding on credit cards, following a further £1.1 bn of borrowing during the month, the latest figures from the Bank of England (BoE) show.
The additional borrowing was 13.5% up on the previous January and marked the highest annual growth rate since October 2005.
While credit cards can be beneficial for borrowers’ credit scores and help spread the cost of borrowing, the temptation to overspend on them can inevitably prove too much for some borrowers.
Given there is no advice associated with this form of borrowing and the relative ease with which credit cards can be obtained, it can be all too easy for borrowers to start tapping away with their plastic friend. This, combined with a lack of financial education or awareness amongst some card holders can leave them at risk of raking up considerable debt, especially in the midst of the rising cost of living.
Within this context, it is perhaps unsurprising that the latest Evolution Money second-charge mortgage Tracker shows an increase in those looking to consolidate debt.
These individuals made up 70% of our overall lending during the three months to February 2023, compared to 68% over the previous three months. In terms of value, debt consolidation loans accounted for 61% of our overall lending, up from 59% in the previous three months.
Our Tracker shows debt consolidation borrowers consolidated six debts on average during the period, borrowing on average £24,183 over a term of 138 months. The average debt consolidation loan amount actually fell by around £1,000 during the three-month period, while the average term increased by three months.
This we believe could indicate borrowers are prioritising certain debts and avoiding taking on additional lending beyond their means, while the extended term gives them a little more time to pay back the second-charge mortgage and spread the cost.
With inflation above 10% – having risen again last month – and wages failing to keep pace, spending on credit cards looks unlikely to ease anytime soon, which means we may see demand for debt consolidation rise further still.
UK Finance figures show there are just over 36 million ‘active’ UK credit card accounts – referring to those with balances outstanding at the end of the month – with around half of these incurring some level of interest.
While this form of credit might be easy to obtain, it is not necessarily the cheapest, with the effective rate on interest-bearing credit cards rising to 19.9% in January this year, up from 19.55% in December, according to the Bank of England. Just before Christmas, Moneyfacts also highlighted the average purchase APR on credit cards (which includes card fees) rose to an all-time high of 30.3%.
The average credit card debt per household now stands at £2,262 and £1,189 per adult, according to The Money Charity. It calculates, paying an average rate of interest, it would take a borrower 25 years and 10 months to repay if making only the legal minimum repayments each month.
While there has been a tendency in the past for some borrowers to rely on switching their debt to a credit card which offers a 0% balance transfer, like other forms of finance, the fees attached to these deals are also rising.
For those borrowers with a competitive fixed-rate mortgage and looking to pay off and consolidate such debt, a second-charge mortgage may work out cheaper than remortgaging and disturbing their main mortgage.
For some homeowners, a second-charge mortgage will be an effective way to consolidate and better manage their debt and as homeowners potentially look to their mortgage adviser for advice on this, it’s important a second-charge is not overlooked and forms part of the advice process.
Susan Baldwin is interim head of lending at Evolution Money
References:
https://www.bankofengland.co.uk/statistics/money-and-credit/2023/january-2023
https://themoneycharity.org.uk/money-statistics/
https://www.ukfinance.org.uk/system/files/2023-02/Card%20Spending%20Update%20-%20November%202022.pdf