Credit card habits impact on economy

The deleveraging process currently being undertaken by UK credit card customers has impacted on the economy.

This is the view of the Centre for Economics and Business Research (CEBR), which has released its latest analysis in the wake of news that the recession continued into the third quarter of 2009.

According to official figures released this week, the UK economy contracted by 0.3% during the three-month period, a revision from the initial estimate of -0.4%.

The data confirms that Britain is the only one of the seven largest world economies to be still in recession.

Charles Davis, senior economist for CEBR, said that this trend could in part be attributed to consumers reducing their credit card balances and paying off other debts.

These moves would have knock-on effects on consumer spending, thereby lowering overall GDP output.

Recent figures from the British Bankers' Association (BBA) have provided evidence for this deleveraging trend.

According to the report, new spending on credit cards reached £5.7bn during October 2009, but repayments hit £6bn.

The BBA also showed that outstanding credit card debt actually rose by £199m during the month, when interest payments on existing balances were factored in.

Customers can avoid these costs by performing a balance transfer to a 0% credit card.

Mr Davis said: "The fact is that Britain as a whole - from corporate to household - was very leveraged when it came to the credit crunch.

"They had taken on quite a lot of debt. As households and business look to de-leverage and reduce their debt levels, the UK GDP is being hit particularly hard."