• Credit card balances shrunk by 14.7% in the year to October 2020, according to data released this morning by UK Finance
• This was the biggest annual contraction since the pandemic struck
• Repayments have now outstripped borrowing for 8 months in a row
• This is good news for the economy, but might be a sign of growing inflation risks
Laith Khalaf, financial analyst at AJ Bell:
“One of the silver linings of the pandemic has been an opportunity for many people to use the enforced frugality of lockdown to reset their finances. As a result, credit card balances have been dropping like a stone and we can expect this trend to continue while we remain in lockdown.
“Paying off expensive credit card debt is precisely what consumers should be doing with the money they are saving in their monthly budget. Around half of credit card balances charge interest, and at an average rate of 17%, that’s a big monkey to get off your back if you can.
“Lower levels of debt also bode well for the prospects of an economic recovery led by UK consumer spending. Tens of billions of pounds have also been squirreled away in bank accounts over the course of the pandemic, a store of dry powder that will likely be unleashed when shopping, eating out and holidays become possible again.
“Of course there are many who are struggling financially as a result of the pandemic too, and with unemployment forecast to rise in the coming months, we can unfortunately expect that number to climb. When we finally emerge from the pandemic, there will be a big gap between the haves and have-nots. The growing risk is that the spending of the financially secure stokes inflation, and makes like even tougher for those struggling to make ends meet.”
