As retailers do their best to entice shoppers in, this year more than ever we may see borrowers turn to credit cards and loans to help shoulder the cost of Christmas.
With inflation at an eye-watering 41-year high, no borrower is immune to rising costs.
While for some this will mean reining in spending over the festive period, for others it will lead to further indebtedness.
Using a credit card to spread out the cost of Christmas is nothing new but the inflationary costs and excessive rise in bills some will experience in the New Year will be.
Recent research from survey technology firm, Momentive, found that over a third of shoppers – 37% – plan to use their credit card to pay for all or some of their shopping over the festive season, with a further 14% turning to Buy Now, Pay Later schemes. This equates to just over half of all shoppers potentially getting into some form of debt.
Of those surveyed, 63% plan to spend less this Christmas than last, due to rising food and energy prices, with 45% still planning to spend between £101-£500, 17% in the region of £500 to £1,000 and 9%, £1,001 or more.
Some 14% of those on low incomes said they are planning to spend more than they have in the bank, followed by 13% on a high income – £50,000 or more – and 10% on a medium income.
It can be all too easy to go over budget at Christmas but now more than ever there is a risk that come the New Year, borrowers will find themselves unable to pay back what they owe. Plus, borrowers face the double hit of rising energy and food bills alongside an uptick in the cost of borrowing.
The effective interest rate on credit cards stood at 18.96% in September, up from 17.86% in December 2021, according to the latest Money & Credit report from the Bank of England.
Interestingly, consumer credit borrowing in September fell to its lowest level since December 2021. Individuals borrowed an additional £0.7bn in consumer credit in September, down from £1.2bn in August. This was split between £0.1bn on credit cards, which fell from £0.7bn in August, and £0.7bn through other forms of consumer credit – such as car dealership finance and personal loans.
The slowdown in September’s consumer spending is believed to be a result of borrowers cutting down on non-essential items as the cost-of-living bites. Nevertheless, the annual growth rate for all consumer credit still increased to 7.2% in September, up from 7.1% in August, marking the highest annual growth rate since March 2019.
Come January, those borrowers with mounting debt may find their options are limited. The era of low-cost borrowing seems to be over and as credit card interest rates rise, the cost of repayments coupled with rising inflation might prove too much for some.
Homeowners locked into a 5-year fixed rate mortgages are going to be reluctant to remortgage to consolidate debt and a second-charge mortgages may prove to be a better option. A second-charge can not only reduce the number of monthly debt payments a borrower needs to make but could also save them around £400 a month.
Once the festivities are over and the bills mount up, we will inevitably see tackling debt become a priority for homeowners. Actively engaging with clients over the next few months and making them aware of their options could help put them on the road to financial recovery in 2023.
Kerri Pender is operations director at Evolution Money
