Borrowing binge leaves families £7,000 in the red

MILLIONS of Britons went on a borrowing binge with credit cards, loans and overdrafts last month.

Family debt rose 9.9 per cent in May compared with a year ago – the highest increase for 11 years – which equates to £7,000 for every household.

The Bank of England figures show the total owed has risen by £16.6billion to £184.3billion, but this does not include mortgages.

The amount owed on credit cards alone rose by £400million to an eye-watering £64.7billion.

The appetite for borrowing would normally be seen as evidence that consumers are confident about their family finances, jobs and ability to repay debts.

However, the figures have alarming echoes of the borrowing binge seen during the Labour years which preceded the financial crash of 2007/08. Then, banks doled out huge sums to individuals through loans, mortgages and credit cards without checks that they could make the repayments.

The result was bankruptcies, home repossessions, family breakups and even suicides.

Justin Modray of consumer group Candid Money said: ‘This is worrying – the figures suggest people are borrowing more and more. If anything, they should be tightening their purse strings and reducing borrowing.’

The current low Bank of Eng- land interest rate of 0.5 per cent means debt repayments are affordable. And rumours in the City that the rate could fall even further suggest the cost of paying off the debt will remain low for the time being.

But this could change should there be a rise in unemployment and the post-Brexit recession that has been predicted by some.

Further down the line there is also a scenario where the Bank of England might raise interest rates to stave off inflation stoked by a fall in the value of the pound.

A debt charity said the average credit card debt of its clients is £8,400, which is equivalent to half their annual take-home pay.

Mike O’Connor, chief executive of StepChange Debt Charity, said: ‘Although credit cards can be a costeffective way to borrow, for many people they have become very expensive, long-term debts.’

The huge sums owed are clearly a cause for concern, however this is tempered by the fact that many have taken advantage of credit card promotional deals which offer zero per cent interest on balance transfers for up to two years.

Other forms of unsecured credit – personal loans and overdrafts – rose by £1.1billion in the month to leave the total at £119.6billion.

Car finance, which allows buyers to pay for a new vehicle in instalments, has been a key driver of the debt blowout. The number of new cars bought with cash borrowed at dealerships surged above one million in the past year.

More than £28billion was borrowed – more than twice as much as just four years earlier.

The Bank of England also reported that the number of loans made by banks and building societies for home purchase were ahead of expectations in May.

Lenders approved 67,042 mortgages for house purchase, which was up from 66,205 in April.

This was a surprise given that many economists had predicted a fall in the housing market on the basis that families would put off any major purchases until after the EU vote.

These same economists are now suggesting the spike in borrowing and spending in May will be a last hurrah. They predict that families will be much more wary about borrowing given the warnings that Britain’s exit from the EU could lead to job losses, a fall in investment and even a recession next year.

Martin Beck, senior economic advisor to the EY Item Club, said: ‘Annual growth in unsecured lending continued to accelerate, reaching a near 11-year high of 9.9per cent in May.

‘However, with the wider economy likely to slow during the second half of the year, as the impact of last week’s vote feeds through, we would expect that the appetite of consumers to take on new credit may start to fade.’

A poll of economists by Bloomberg showed that nearly three quarters of them expect the UK economy to enter a recession at some point in the next 18 months.

Howard Archer, chief UK economist at IHS Global Insight, said: ‘It is very possible that heightened uncertainty and concerns following the Brexit vote will markedly rein in consumers’ willingness to borrow.

‘Banks may also become more wary about unsecured lending to households.’

‘Very expensive long-term debts’