Back in early January, when corona was just a mediocre beer, the Bank of England published something odd.
For the first time in six-and-a-half years, people paid back more than they borrowed on credit cards. And as unusual as the statistic itself was the bank’s reaction to it.
‘The extra amount borrowed by consumers in order to buy goods and services fell to £0.6billion in November,’ it said in a statement that was almost melancholic.
Last November, households paid down more credit card than they borrowed for the first time since 2013, the Bank of England revealed in January
It added: ‘This is the weakest since November 2013, and below the £1.1billion average seen since July 2018.
‘These weak flows mean the annual growth rate of consumer credit fell to 5.7 per cent in November, compared to 6.1 per cent in October. It has now fallen 3.7 percentage points since July 2018.’
Fiscal hawks like to compare the UK economy to a household budget, but could you imagine someone paying off their credit card bill and being sad to see it go?
Fortunately for economic policymakers, things ‘recovered’ in December and households were back to loading up their credit cards with £400million of more borrowing.
Last November remains a strange sub-zero entry on a chart otherwise filled with skyscrapers, for reasons no one, including the credit card companies I asked, can seem to understand.
Because of course, the UK economy is built on spending, often fuelled by debt – credit cards, personal loans, car finance.
We don’t want to shrink it, only keep it manageable; and keep the Jenga tower from falling over.
November’s entry sticks out like a sore thumb on charts showing how much Britons borrow on credit cards
Since the end of 2015 we have saved less, and since 2016 the poorest fifth of households have become poorer, according to the Office for National Statistics and the think tank the Resolution Foundation.
We owed £72.2billion on credit cards in January, almost £225billion in unsecured debt overall, and another £7.7billion back to the banks in overdrafts.
Before coronavirus hit, there were already signs our perilous personal finances were on borrowed time.
Regulators have clamped down on borrowers simply shuffling balances from interest-free term to interest-free term, and balance transfer deals have shortened by as much as a year since 2017.
Britain’s £225billion unsecured debt pile is a Jenga tower. Regulators have spent the last few years trying to get people to act to pay down debt
They’ve warned people who simply pay the minimum on their credit cards every month could have them cancelled to try to get them to up their repayments.
And the banks have reacted to a crackdown on unarranged overdraft fees by setting the cost of borrowing at close to 40 per cent across the board.
But now we have a virus which has caused an economic crisis and masses of redundancies, with even those who are just furloughed or lucky enough to be eligible for government support facing pay cuts or months before those Treasury-backed pay packets arrive.
And banks, credit card companies and regulators have reacted quickly to throw unsecured borrowers something of a lifeline.
With the focus now on helping households stay afloat and afford essentials, we have seen the introduction of bigger overdraft buffers and banks writing off fees, higher credit card limits and no cancelling of cards until at least October.
And new proposals will allow borrowers to put credit card and loan repayments on hold for three months.
As a result it seems almost inconceivable that when the figures come out for March and April our Jenga tower of debt hasn’t increased by a lot more than the average of 6.1 per cent we’ve seen since last May.
It’s hard to blame the banks and indeed it’s probably the only thing they can do in the short-term.
Lloyds Bank and HSBC have offered increased fee-free overdraft buffers in response to coronavirus, while Barclays and Nationwide have offered to temporarily write off fees
You can’t just block someone’s credit card if they’ve just lost their job and have no savings to buy food with.
But I can’t help but be concerned about the way we’re throwing more unsecured debt at people in need, especially when there’s doubt over whether they might be able to pay it back.
That lifeline could quickly become a chain around the ankles of either the most vulnerable households or those with no previous financial difficulties who have just seen their livelihoods yanked out from underneath them.
As one person in the industry said to me: ‘There is a real worry about storing up long-term problems by racking up more debt and postponing the point at which the financial impact then hits the household later.’
After all, this debt isn’t free and, increasingly, isn’t cheap.
That overdraft buffer from HSBC might be £500 for the next few months rather than £25, but it was still set to be 39.9 per cent APR.
The FCA, in a sign of how frustrated it must have been at banks’ reactions to its changes designed to reduce the cost of overdrafts, has said banks must not charge borrowers more than they did before almost all of them set their overdraft rates at close to 40 per cent.
Prior to that instruction only NatWest voluntarily reduced the underlying cost of an overdraft, while Bank of England base rate cuts of 0.65 percentage points don’t do much to a credit card APR of 22 per cent.
And proposals to let people put their credit card repayments on hold wouldn’t stop them being charged fees, instead they’d just be rolled up and charged later. The costs will eventually come.
Perhaps in the case of overdrafts banks could compartmentalise the borrowing through these additional buffers as ‘corona debt’, and not retrospectively apply interest to them.
For example, if someone usually had a £25 fee-free overdraft with HSBC, and maxed out their temporary £500 buffer, perhaps once they paid off £25 they could access that usual buffer again and any borrowing beyond that would be charged at the usual overdraft rate.
That way, you wouldn’t give someone any more debt, but you also wouldn’t charge them for taking it out in extraordinary circumstances.
These are issues for another day of course, and if we are able to help keep people in work – even if they are furloughed – and coronavirus doesn’t lead to mass and sustained unemployment, then that is almost certainly the best way of ensuring people have the money to pay down whatever debt they’ve found themselves in.
But it bears thinking about, and it’s hard not to be worried the measures we’ve brought in with the best of intentions might well end up making things a whole lot worse in a few months’ time.
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