'borrowing Up, Savings Down' Spells Trouble for UK Economy

Latest financial industry figures show that UK savings balances are reducing at the same time that borrowing levels are on the increase, as millions of Britons struggle to pay their increased mortgage payments and increased utility bills.

The credit crunch is being blamed for people using their savings to pay for luxuries such as summer holidays, and that draw on cash reduced the UK’s savings balances by £11billion in the third quarter of 2007. However, at the same time according to Unbiased, a website promoting independent financial advice, UK consumers also increased their borrowings by £11.7billion as people took out more loans and increased credit cards usage.

Unbiased’s research examines the relationship between savings and borrowings, excluding mortgages and highlights that over the third quarter of 2007 UK consumers borrowed 35p for every pound saved. That represents a significant increase on the figure of 13p borrowed against every pound saved in the previous quarter.

Chief executive of Unbiased, David Elms said: "We’ve seen a lot of financial markets activity in the third quarter of 2007, which marked the beginning of the Northern Rock crisis. Summer interest rates were still at a relatively high 5.75% and many people will have seen their disposable income reduced as the credit crunch kicked in. Although the drop in savings and the high level of borrowing come as no surprise, it is worrying."

The situation is unlikely to improve in the short term, especially during the run up to Christmas when spending is predicted to increase significantly. That Christmas spending has to be funded somehow, and many financial experts are expecting it to be by credit card. Indeed, experts expect the amount spent on UK credit cards over the past three months to rise sharply - not only fuelled by Christmas spending, but also by worrying evidence that, in the light of the credit crunch, many are using their cards to fund day-to-day expenditure.

Many Britons have got used to the financial landscape of the last 10 years in which consumer credit has been easily accessible, but many expecting to take advantage of new interest-free credit card deals are likely to be disappointed. The credit crunch has bitten and many lenders have drastically tightened their lending criteria, leading to record numbers of applicants being turned down for new credit cards.

Unfortunately, as many are now finding to their cost, it is no longer a case of being able to compare credit cards, and transfer your balance interest-free to the one you want. Indeed, it is now the credit card companies that are doing the comparisons and cherry-picking their card-holders.