As recession looms and inflation reaches 10%, British consumers borrow more on credit cards to maintain their living standards.
Graph 1. United Kingdom: Consumer Credit (Credit Card Debt; Other Loans and Advances), July 2017-July 2021
The data “suggests that consumers are already battening down the hatches against what will almost certainly be an exceptionally tough winter,” said Thomas Pugh, an economist at the consulting firm RSM U.K. The situation is expected to deteriorate further with the increase in gas and electricity bills.
While banks earn revenue whenever customers use their credit cards, most fees go to Visa and Mastercard. Credit card issuers’ revenue comes mainly from cardholders paying lots of interest.
According to the debt charity StepChange, the share of new clients citing the cost-of-living crisis as their reason for debt rose to 20% in July 2022, 2% higher than in June. More than two-thirds reported having substantial credit card debts.
In a 2020 study, Merle van den Akker, Neil Stewart, and Andrea Isoni (Warwick Business School) found that people with contactless cards spent “significantly more” than those without, drawing on a dataset of over 300 million transactions of 260,000 customers. The authors found that contactless spenders were likelier to make more purchases overall and be charged overdraft fees. Contactless payments promote “increased spending; decreased Money in physical form such as banknotes and coins. More usage and increased use of debt,” they wrote.
Some consumers are resorting to “buy now, pay later” (BNPL) financing schemes such as Zilch to spread payments on electricity and gas bills. Britons spent at least ₤2.7 billion in BNPL debt in 2020, according to the Financial Conduct Authority (FCA).
Many customers are unsure whether BNPL is debt and have difficulties tracking their balances across providers. Borrowing to pay for essentials through BNPL “can be like quicksand – easy to slip into and very difficult to get out of,” said Matthew Upton, director of policy at Citizens Advice.
Brits are also pawning valuables. “With everyday costs soaring, it’s no surprise to hear more people are using pawnbrokers. But you shouldn’t need to put your wedding ring or a family heirloom at risk to pay an unexpected expense,” said Theodora Hadjimichael, CEO of Responsible Finance.
Many U.K. consumers have stopped using cards and contactless payments and switched to cash for controling expenses.
A year ago, buying Starbucks coffee with contactless cards was “just tapping. It didn’t feel like real money, it was just my card. When you’re physically handing over solid money, it just makes you think twice,” said Samantha Thomas, a 41-year-old private tutor from Wigan.
On her YouTube channel, Thomas shows how to budget with “cash stuffing,” a budgeting technique that has drawn increasing attention online (see Graph 2). She separates funds in labeled envelopes for groceries, travel, credit card debt, and emergencies. Ms. Thomas withdraws her wage at the start of the month.
Graph 2. United Kingdom: Google Searches for Cash Stuffing, September 2021-September 2022
Leaving debit and credit cards at home has helped Ms. Thomas prepare for rising costs. “I feel like I’m ahead of the game, I feel like I’ve got an advantage. It’s definitely going to be tricky, but I feel like I’ve already got lots of tools in place to help me. I feel like it’s going to be a big hurdle,” said Ms. Thomas.
Jade Edmonson sells cash-stuffing materials on her Etsy page. Edmondson, a 29-year-old teaching assistant from Coventry, uses 30 envelopes for gas, Christmas savings, and club memberships.
Cash stuffing helped Ms. Edmondson save money for her children’s return to school. “If this was me last year, I would be panicking: ‘How am I going to pay for all of this? Whereas actually, now, I don’t worry about money. [But inflation is] still very nerve-racking. It’s like: ‘Where are we going to find this extra money from?’” said, Ms. Edmonson.