More UK households are heading towards a precarious financial situation. The Office of National Statistics (ONS) has recently announced that the UK Savings Ratio has dropped to 1.7%. This means that households are saving only 1.7% of their disposable income. This savings figure is particularly alarming when taken alongside the continued rise in credit card lending.
Credit card lending rose between May and June, hitting £16,058 million. While this number is a bit lower than April's £16,371 million high, the trend of increased credit card lending continues. Perhaps related to the increase in credit card debt, credit card issuers are offering longer and longer purchases and balance transfer offers. This can result in consumers carrying debt for longer. As we discussed in our article Is the Growth in 0% Purchases Cards Good or Bad for Consumers, longer 0% periods are not always beneficial.
Savings are important to carry households through unexpected financial stress - perhaps lost income or unexpected bills. The Money Advice Service recommends you have at least 3 months of expenses saved up. Using data from the ONS, we found that the average household spends £529 per week on expenses like food, housing, transportation, entertainment, etc.
To cover 3 months of spending, most households should therefore have over £6,300 of savings tucked away. As the savings ratio dips lower and lower, fewer households will find themselves with enough savings.
Taken together, these lending and savings statistics are a worry. With less money saved up in the bank, consumers finances are more vulnerable. Without a savings buffer, any loss of income or unexpected bills can make existing credit card monthly payments even more difficult to make, potentially resulting in costly fees and higher interest rates as discussed in our article about how balance transfers work. Hand in hand, rising credit card lending and a lower savings ratio can be a recipe for financial disaster.