HomeEconomic IndicatorIncreasing interest rates put financial pressure on households in UK and US,...

Increasing interest rates put financial pressure on households in UK and US, affecting borrowing costs.

Rising Borrowing Costs Strain Households in the UK and US

Financial Hardships Ahead for UK and US Households

A recent Financial Policy Summary from the Bank of England has raised concerns about the increasing financial burdens faced by households due to rising borrowing costs. With interest rates soaring to 5.25% after 14 consecutive rate hikes, families are finding it harder to manage their debts.

Mounting Debt and Increased Financial Pressure

As borrowing costs continue to rise, households are allocating a larger portion of their income towards paying off debts, including credit card bills. This trend is expected to persist in the coming months. Although consumer debt remains below its peak in 2007, the combination of high-interest rates and long-term mortgages (30 years or more) has led to a significant increase in arrears.

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Impact on the Most Vulnerable

The poorest individuals, who are predominantly renters and make up the majority of the UK population, are increasingly relying on credit cards for everyday expenses. This vulnerable group is particularly susceptible to the effects of high inflation and interest rates. The resumption of student loan repayments further adds to their financial stress.

Concerns Growing Among American Households

A survey conducted by the Federal Reserve Bank of New York reveals a growing apprehension among Americans about missing debt payments. The perceived risk has risen to 12.5%, especially among those under 40 with some college education and households earning less than $50,000 annually.

Inflation and Higher Interest Rates Take a Toll

Lower-income individuals and those with lower credit scores are disproportionately affected by inflation and higher interest rates. The average credit card APR has reached a staggering 24.45%, and credit card debt has surpassed $1 trillion for the first time in 2023. Despite these challenges, household spending growth remains stable, but the rise in consumer goods prices may exacerbate the situation.

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Changing Payment Methods and Future Outlook

Credit card delinquency rates have increased, although they were temporarily kept low due to stimulus payments and reduced spending during the pandemic. More people are now opting for ‘Buy Now Pay Later’ plans for holiday shopping, signaling a shift in payment methods. While inflation is expected to continue rising in the short term, long-term inflation is projected to stabilize.

This article provides a comprehensive overview of the current financial challenges faced by households in the UK and US. It highlights the impact of rising borrowing costs, increasing debt burdens, and the struggles of the most vulnerable individuals. Despite these difficulties, both the UK and US banking systems are well-prepared to support households and businesses, ensuring resilience in the face of geopolitical risks.

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