This briefing draws upon the latest data from the UK Economic Accounts released by the Office for National Statistics on 31st March 2017 (covering the period up to December 2016) and from the Bank of England’s NMG Consulting survey (‘the NMG survey’) to provide information about the level and distribution of the household consumer credit debt burden. It provides evidence that the consumer debt repayments are now are a higher burden for households than before the financial crisis of 2008, and argues that policy initiatives are needed to reduce this to boost economic growth. It also provides some brief pointers for the direction of future research.
The cost of debt servicing
The Economic Accounts provide data on the total amount of interest payments made by the household sector on a quarterly basis going back to 1987. In 2016, these amounted to just over £58 billion, which is the equivalent of 4.5% of total household sector income. Whilst the overall level of interest payments to income has fallen considerably since 2008, this has largely been achieved by the low base rate environment benefitting households with mortgages. For households without mortgages, and holding consumer credit debts, the trend is significantly different (see figure 1, below).
Figure 1: Consumer credit and ‘other, mainly mortgage’ interest payments, rolling 4 quarter (March 2000 – December 2016)
Although the nominal level of interest payments on both consumer credit and other (mainly mortgage) debt both fell from their crisis peaks in late 2008, the trends began to diverge from the end of 2009 onwards.
- The interest payments on consumer credit debt stopped falling in December 2009 and remained relatively constant (at around £23 billion per year) through to June 2014. However, they have grown strongly since then and currently stand at £28.3 billion. In the past year alone the level of consumer credit interest payments has grown by more than 7%.
- In contrast, interest payments on non-consumer credit debt (which is mainly accounted for by mortgages) peaked at around £72 billion per year in 2008, and these have continued to fall to their current level of £30 billion.
Although consumer credit debt makes up around 15% of total household sector indebtedness, it accounts for around half of the total interest payments that the sector is making.
There are two reasons why consumer credit interest payments have increased in recent years.
Firstly, interest charges on most consumer credit debt have not significantly reduced despite low base rates. Although the average effective interest rate of personal loans has fallen, credit card rates have remained around 18% since March 2009 and overdraft rates rose from 8% to over 10% in 2011 and despite some fluctuation have been at that level from 2014 onwards.
Secondly, the amount of consumer credit debt held by households has increased in recent years. The total amount outstanding at the end of 2016 was £236.5 billion, which exceeds its peak of 2008 by 4.6%. There has been a particularly strong growth (of 14%) in consumer credit debt in the past year. Since 2008, this growth has been led by credit card debt (with the highest interest rates) which now accounts for around 41% of all consumer credit debt (compared to about 33% in 2008).
Figure 3: Total outstanding consumer credit, £ billions, 2000 – 2016
The distribution of consumer credit debt
Consumer credit debt is not distributed evenly across the population. The latest NMG survey indicates that just under half of all households (48.5%) have consumer credit debts outstanding and that the debt to income ratios of low to middle income households are much higher than for those further up the income distribution (figure 4, below).
Figure 4: Average debt to gross income ratios, by income quintile
Those on the lowest incomes have a debt to income ratio which is nearly four times as high as those at the top of the income distribution (46.5% compared to 12.9%).
As a result of carrying more debt relative to income, and because the interest rates charged to lower income households are also often much higher than for wealthier households, the level of debt repayments made by low to middle income households are a significant burden. Households in the lowest two income quintiles are currently paying out around one fifth of their gross (pre-tax) incomes to consumer credit lenders.
Figure 5: Average debt servicing to gross income ratios, by income quintile
We estimate that there are around 4.8 million households, containing 11.4 million people, in this position.
Implications for policy and future research
The level of consumer credit debt repayments represents a significant drag on economic growth. £28 billion per year is the equivalent of around 1.5% of GDP. Finding ways to reduce the consumer credit debt burden are therefore required if we are to boost growth – but this needs to be done in a way that encourages savings that can be channelled into investment rather than simply opening the way for a further consumption boom and new household borrowing.
Contrary to mainstream economic thinking, the vast majority of consumer debt repayments are not intermediated to other households holding deposits. This is because much of the lending is leveraged relative to the amount of savings and investments held by (wealthier) households, and also because the financial sector has taken an increasingly large share of revenue generated from consumer credit lending to aid in the restoration of its balance sheets in recent years. We will be conducting further work to estimate the extent of this in the next few weeks.
Even if the majority of consumer credit debt repayments were to be intermediated to other households in the form of interest payments on their savings and investments, this would contribute to a significant worsening of wealth inequalities. Again, estimating this effect deserves greater study.
Damon Gibbons, 6th June 2017
 In order to smooth out the volatility of quarterly data we present it on a rolling 4 quarter basis. This gives an annual rather than quarterly figure.
 Centre for Responsible Credit calculations using Bank of England and ONS series on consumer credit debt outstanding and average effective interest rates.
 The NMG survey was conducted in August and September last year, covering 6,011 UK households. The survey data was released by the Bank of England in December 2016.
 The household sector includes not for profit institutions serving households (‘NPISH’) such as universities, trade unions, and political parties as well as households themselves. We have previously provided an assessment of NPISH liabilities in our report for the TUC, ‘Britain in the Red’.
 ONS series J4WZ
 GDP, current prices measure