With the Bank of England expected to increase interest rates as early as May, what will be the impact of this on the UK’s financially constrained households?

A report published this week by the Resolution Foundation[1] examines the possible consequences. It maintains that whilst the majority of UK borrowers are relatively well placed for an interest rate hike, regard needs to given to lower income households already experiencing ‘debt distress’.

The increase in the UK’s use of consumer credit has been well documented over recent years. Annual growth in consumer credit reached 10.9 per cent towards the end of 2016 – its highest rate since 2005 and while it has slowed down slightly, it remained at 9.5% in December 2017. The report attributes much of this to car finance, interest free credit cards and personal loan growth rates. It states that most of the increase in consumer debt since 2014 was among middle and higher income groups, who are well placed to absorb the potential increase in interest rates.

The think tank notes that while average debt servicing ratios remain low by historical standards, there are signs that financial distress may be making a comeback. The emergence of household debt over recent years has prompted signs of growing debt distress, making low-income household borrowers particularly vulnerable to economic change.

Importantly, the report considers the number of households who have been put off spending by not having access to credit.  28% of households reported this constraint but the figure rose to 37% for the poorest fifth of working age households.

Our view, as is the view of many, is that credit remains sensibly available to those with lower incomes to allow for smooth income flows in the times ahead.

[1] http://www.resolutionfoundation.org/publications/an-unhealthy-interest-debt-distress-and-the-consequences-of-raising-rates/