In April 2016, Bank of England figures showed a £1.3 billion rise in consumer credit, representing a 10% increase from April 2015. Further, debt charity StepChange stated 14 million UK consumers were in debt from using credit cards to cover bills, and the charity is concerned that another “economic shock” could increase the pressure. If the EU referendum forces another recession, how would UK consumers be affected?
UK consumer debt rising
UK collective personal debt reached £1.475 trillion in April 2016, which was up from £1.437 trillion in April 2015, as reported by financial capability organisation The Money Charity. The charity also revealed the average adult was £29,210 in debt, accounting for 112.7% of median earnings.
9.61 UK households were without savings as of June 2016, according to The Money Charity's figures. To put this into perspective, there were an estimated 26.7 million households in the entire country in 2014. At a rough calculation, approximately one third of households could not rely on savings if there was a new recession.
For those borrowing, outstanding consumer credit lending reached £183.2 billion by the end of April 2016, which was up from £173.1 billion 12 months earlier. Per household, the average consumer debt was £6,787 for April 2016. With mortgages included, the average total debt per household rose from £54,592 in March 2016 to £54,636 in April 2016.
Unrequested credit increases
In the event of an economic shock, StepChange has expressed concern that indebted consumers will struggle further. The charity’s Chief Executive, Mike O’Connor, has called out banks for awarding unrequested credit rises: “When their credit limit is increased without asking, these key decisions are taken away from [consumers] and they face the risk of taking out credit they cannot afford”.
Supporting his belief, O’Connor said 54% of the charity’s clients had received credit increases without requesting them. In a single year, the charity encountered around 100,000 consumers who received such an increase. From those people, O’Connor revealed that about half had felt worse off after getting more credit.
Consumer implications of Brexit
In November 2015, the Financial Conduct Authority (FCA) revealed interim findings from its credit card market study of 34 million UK consumers over five years. As of January 2015, the FCA calculated that 5.1 million active credit cards would take more than a decade to clear if no additional borrowing was incurred.
Since then, the UK economy has entered a period of uncertainty, with the EU referendum causing much of the doubt. During this time, the pound to euro value fell to 1.2311 – representing an 18-month low.
For UK consumers, they need their currency to be strong at a time when credit card debt is increasing. Fundamentally, a weak currency results in imports being more expensive, and the situation could worsen if Goldman Sachs’ prediction that Brexit will cause a 20% decline in the pound’s value comes true.
The UK economy might need years to recover from a new recession. At present, millions of households have no savings to fall back on, while credit card debt is widely increasing. Another financial downturn would only make life tougher for much of the country. Being prepared is the best remedy for a struggling economy. Take control of your finances today by contacting Dukes Bailiffs for expert guidance on budgeting.