UK consumer debt: Moody's warns of credit card time bomb

British consumers are taking on personal debt at an alarming rate, leaving them increasingly vulnerable to economic shocks, according to a new report published on 15 July.

The study, carried out by credit ratings agency Moody's, shows that the amount of debt taken on by consumers is outstripping wage growth and surpassing pre-crisis levels.

Greg O'Reilly, analyst at Moody's, said: "Low interest rates are hiding the risk to consumers, making consumer debt appear more affordable on the surface, but masking potentially negative long-term consequences."

Moody's research shows unsecured lending to consumers has jumped to nearly 7% year-on-year since December 2012 and warns that consumers will have less capacity to repay credit card balances because of declining savings and wages.

It added that the growth in consumer lending has coincided with the rise of challenger banks, whose credit card balance growth rates have overtaken those of established high street banks.

Moody's considers challenger banks' "credit card debt to be more at risk from an economic shock than those of the high street banks."

The report comes just weeks after figures from the British Bankers Association (BBA) revealed that the amount of debt taken on by British families has rocketed to the highest level in nearly five years.

Alongside increased credit card take-up, mortgage lending has also contributed to the surge in consumer debt.

Britain's economic recovery has been boosted by consumer spending, with June figures showing it grew at its fastest pace in five years. Household spending climbed 1.4% compared to a year earlier, the biggest rise since 2010.

However, Moody's expects credit card delinquency, when people fall behind on credit card payments, to remain stable because of low unemployment and low interest rates keeping bills manageable.