Brits are using higher wages to pay off credit card debt

British households are using higher wages to pay off their credit card debts, rather than relying on the plastic for their shopping, in the latest sign that the economy is performing well.

At the same time businesses are reducing their reliance on the banks by borrowing directly from investors such as pension funds and insurance companies through the capital markets, reports The Telegraph.

Both developments are signs that the UK could be moving on from the pre-crash mentality of relying heavily on banks to fund consumption and investment.

Credit card debt repayments almost exactly matched new borrowing at £9.5bn in September, although interest payments meant overall credit card debt edged up by £67m to £41.4bn.

Overall unsecured borrowing, including loans and overdrafts, increased by £116m in the month, the slowest pace for 12 months.

Economists believe this is a positive sign that consumers have more cash in their pockets and so can either spend their income or use it to pay off debts.

“Muted consumer credit in September may be a reflection of the fact that fewer households are having to borrow at the moment to finance their spending due to the appreciable boost to purchasing power coming from negligible inflation, rising earnings growth and record high employment. In fact, there was deflation of 0.1pc in September,” said Howard Archer, chief economist at IHS Global Insight.

“Muted consumer credit in September may also dilute some concern that consumers have becoming increasingly tempted to take on debt to fund spending.”

Business lending fell in the month, with the total debt of non-financial businesses down by £1bn to £260bn.

Businesses and politicians typically argue that falling debt is a bad sign as it shows either a reluctance by banks to lend, or that firms do not want to borrow because the economy is in poor shape.

However, this time the fall may be because big businesses are diversifying their sources of credit – bond and equity market finance is up £16bn since the start of the year, indicating firms are still borrowing, just not necessarily from banks.