The idea that Europe could suffer a serious economic hit through deflation acting as a brake to consumer spending as they delay purchases to take advantage of future lower prices has taken another knock as UK credit card debt growth hits a 12-year high. The notion that this is due to a consumer spending splurge is not entirely true since evidence suggests that for some families, using a credit card is the only way to match the hole between disposable spending and essential purchases; for others, it is a ticket to a more indulgent “have it now” lifestyle.
UK credit card debt growth has caught up with the level seen before the Global Financial Crisis hit. Unlike many European credit cards, the outstanding balance on a UK credit card does not need to be cleared at the end of each month, so it represents a mechanism for unsecured borrowing. The UK system allows the whole outstanding sum to be cleared, of course, but also allows borrowers to repay any sum above a minimum monthly repayment, building up debt to a maximum level set by the lender.
According to UK finance, annual growth in outstanding credit card debt rose by 8.3% in February, its biggest hike for 12 years. Understandably, the rate in credit card debt expansion is growing faster than other forms of credit such as personal loans or overdrafts since these (normally) require bank approval. In February, there were some 220 million credit card transactions in the UK, showing the popularity of cards as a payment mechanism. This was a 3.3% increase over the February 2017 figure.
Typically, a credit card company charges an annual fee to customers and a fee to retailers accepting the card for payment (which they guarantee). However, the current interest rate charged on credit cards is about 23%, the figure varies from lender to lender and with the package on offer. This compares poorly with personal loans from banks which range from 2.8% to 7.4%, typically, depending on the sum borrowed, the repayment schedule and the bank in question. However, borrowing on a bank loan requires approval whereas once you have a credit card, that form of borrowing can be extended without any authorisation up to the credit limit: buyer beware!