The latest figures for consumer borrowing - that is borrowing other than for the family mortgage - is reversing the growth shown in recent years.
Borrowing has slowed to 1.4 per cent a year - compared to the level of over 10 per cent (11.7 per cent) it has averaged over the last 10 years. Borrowing is now falling in real terms for the first time since the early 1990s. It is also growing more slowly than earnings which are currently growing at 4.2 per cent a year - and more slowly than inflation. (Inflation is running at 3.6 per cent according the Retail Prices Index (RPI) or 2.4 per cent using the newer Consumer Prices Index.)
Credit card borrowing fell every month between February and August this year, the longest series of monthly falls on record. Despite a small rise in September it reached the lowest level since December 2004.
What is more, consumers intend to reduce their borrowing further. According to Alliance & Leicester's survey, people intending to reduce their credit card debt over the next six months outnumber those expecting to borrow more on their cards by a factor of five to one. More than eight times as many people plan to reduce their other personal borrowing as those who intend to increase it. People with mortgages are the group most likely to be reducing their debts.
On current trends, the Alliance & Leicester Borrowing thermometer will move from its rate of 8.25 per cent to 8.5 per cent by the end of 2006, indicating that the risks to the economy from consumer indebtedness are reducing.
Chris Rhodes, managing director of Alliance & Leicester Retail Banking, said: "2006 has been a turning point for the UK consumer. People are now seeing their unsecured borrowing fall relative to their earnings. We have not seen consumer borrowing this subdued since the recession of the early 1990s. The good news is that this time the economy is performing well and employment is at an historic high."
Back in January this year, the majority of those with a credit card balance (61 per cent) said they planned to pay it down. Overall credit card debt has fallen by £2.7 billion in the eight months since then from an all time high of £58.2 billion at the end of January. On average households owe £2,140 on credit cards, £103 less than in January. Between August and September, borrowing rose by £4 per household.
The rate of growth in credit card borrowing has fallen every month since May 2005 from an annual rise of 11 per cent to an annual decline in September 2006 of 3.2 per cent.
In July, once again the majority of those with credit card debt (63 per cent) said they would continue to reduce their credit card borrowing. If trends continue at their current rate, then by the end of the year borrowing on credit cards will reduce to between £54.5 billion and £56 billion, depending on how enthusiastic people are in the run up to Christmas - the lowest level since October 2004. It would also mean that 2006 would be the first year that credit card borrowing has declined since the Bank of England began to keep records nearly 20 years ago.
Growth in unsecured borrowing (excluding credit cards) has also fallen, although not as sharply as for credit cards. Over the last ten years, unsecured borrowing grew by an average of 10.7 per cent a year. By September this year, the annual growth had slowed to 3. per cent, the slowest rate since 1993, slower than earnings but in line with retail price inflation. The average household owes just over £6,000 in unsecured loans (£6,027). In July, three quarters of borrowers (76 per cent) said they planned to reduce their personal loans - compared to just 9 per cent who plan to increase them. If borrowing continues to follow this year's trend, then unsecured personal borrowing will stand at £158 billion by the year end. This is £11 billion less than it be would have been had the trend echoed that of the last ten years.
Overall the total growth in borrowing on both credit cards and unsecured loans stands at just 1.4% this year, well below both wages and inflation. At the end of September, UK total unsecured borrowing reached £212 billion, £8,168 each on average, almost unchanged on the level at the end of 2005.
Two thirds (67 per cent) of homeowners with a mortgage who owe money on their credit cards say that they plan to reduce their borrowing by the year end, with less than a tenth of this figure (6.5 per cent) planning to increase it. Similarly 79 per cent of those with unsecured loans said they plan to reduce these - more than ten times the number of those who plan to borrow more.
Although the majority of people living in social housing also plan to reduce their borrowing, this group is twice as likely to increase the amount they owe on credit cards compared to homeowners and nearly twice as likely to add to their other unsecured borrowing. People who live at home with their parents are also more likely to expect their borrowing to rise (13 per cent).
Rhodes added: "This summer Alliance & Leicester announced that we believed our personal loans bad debts were peaking. Although the economy now appears more benign, people on lower incomes in social housing are affected disproportionately by inflationary pressures. The prices of many non-discretionary items such as energy have risen fast and these take a bigger bite out of their incomes, even though they do not have mortgages to pay.
"But we are also seeing a cultural shift. People seem less willing to pay back their debts than in the past. This trend is highest amongst non homeowners. The rapid growth of companies that encourage borrowers into taking our Individual Voluntary Arrangements (IVAs) as a solution to their debts is partly to blame. By taking what is being marketed as an easy option, many people are unfortunately not considering the long term consequences. Many of these people will find it harder and more expensive to get credit when they need it in future."
