The Bank of England last month released figures which showed consumer credit rose by 1.9 billion pounds in February. This is a sharp increase, the largest monthly rise in nearly 5 years. To put it in context, it is roughly 1 billion pounds more than expected in a Reuters poll of economists.

The rise in lending to consumers could be driven by a boost to consumer optimism as the spread of the Omicron Variant eased. A further, perhaps more plausible possibility is that financially stretched consumers have had to resort to taking on more credit in the face of significant cost of living increases.

In addition, inflation hit a 30 year high of over 6% in February and this exacerbated the cost of living increases. (March figures show inflation at 7%). To compound matters the government’s budget watchdog also recently forecast that the inflation rate would climb to 9% later this year, again increasing the biggest fall in living standards since the 1950’s.

If it transpires that consumers are borrowing more due to the cost of living crisis this is unusual. Households usually reduce demand for credit during periods when finances are tight. This time however things may be different due to the sheer scale of the cost of living increases and the necessity by households to take on more debt just to ease this pressure. Maybe debt is being used to pay for essentials such as fuel, food and utilities. If this is the case then the economy could be in real trouble and insolvencies would rocket.

To give some scale to the debt increase, credit card lending accounted for the bulk of the increase in February at 1.5 billion pounds, the biggest rise since monthly records started in 1993.

Bank of England data also showed mortgage approvals and the value of secured lending were weaker than expected, perhaps this is a first sign that some of the heat may be leaving the housing market. Lenders approved 71,000 mortgages in February down from 74,000 mortgages in January.

It remains to be seen whether consumers will take on more debt to fund the increasing cost of living crisis. Of course, there will come a point when taking on more debt is unaffordable and at that point becomes ‘problem debt’ and needs to be addressed.

The golden rule remains as always, as soon as debts become difficult to manage and unaffordable a debtor should contact a reputable debt advice organisation to get free confidential and impartial debt and insolvency advice.

We may see a huge increase in insolvencies over the next few months due to the cost of living crisis and inflation. If this is the case then the normal insolvency procedures are available to individuals including bankruptcy, individual voluntary arrangements and debt relief orders.

To discuss your financial difficulties with a professional in confidence, please contact Farleys’ personal insolvency team on 0845 287 0939, complete our online contact form, or chat to us through the online chat below.