The Covid-19 crisis has made us better money managers — but will it last?
The change in consumer behaviour prompted by the pandemic has been staggering — and I say this as someone who earns a living monitoring the rates on savings accounts, credit cards and other financial products.
With our finances on lockdown, we became forced savers, unable to spend on holidays, socialising and commuting costs, as well as “fear savers” who limited our spending over concerns about the economic consequences of coronavirus.
In terms of cash saved up and debts paid down, the total net improvement to the UK consumers’ balance sheet has been £85bn, according to the Bank of England. Now that the economy is opening up, children are back in school and more of us are heading back to the office, our finances are once again at a turning point.
Last week, Bank of England data showed that household borrowing rose for the first time in four months in July and bank deposits normalised, suggesting that consumers resumed spending after hoarding cash during the lockdown.
Yet as the furlough scheme comes to an end this autumn, prompting an expected rise in redundancies, the fear factor is still dominant when it comes to managing our spending, saving and borrowing.
Whether you’re a “super saver”, a “debt slayer” or a “big spender”, there has never been a more critical time to get a handle on your money habits and find the best financial deals.
Spend, spend, spend
Let’s wind the clock back around nine months to New Year’s Day 2020 and consider the kinds of financial plans you might have been making back then.
My wife and I had a European city break pencilled in for the spring and a two-week Caribbean trip in November that needed to be paid for by the end of March, plus our eldest daughter had planned to get married in Cyprus in May — plenty of dates to fill up the new kitchen calendar.
We also planned to spend some money on home improvements, giving the bathroom a makeover (although we said the same in January 2019) and perhaps part-exchange the Volvo for something a bit trendier — like our neighbour’s 18 plate SUV. There may have been similar conversations going on in your household.
I prefer to buy on credit card for the consumer protection it brings — and made a mental note to up the limit on our credit cards to cover it all. But, for many people, paying on plastic has become the norm.
In the decade following the financial crisis, ultra-low interest rates meant consumers with good credit histories could borrow extremely cheaply. Personal loans at less than 3 per cent and zero per cent credit card deals spanning more than three years became commonplace, renewing our appetite to consume. The economy grew as our levels of borrowing rose.
If buying on credit was an Olympic sport, Britain would surely take the gold medal. The UK’s collective credit card bill had been steadily growing and in January this year stood at £69.7bn, according to UK Finance, the banking trade body.
At the same time, households were saving less. We entered the pandemic with the household savings rate at almost its lowest point since records began in the 1960s. Nowadays, many people don’t even have an emergency savings account — and with such low interest rates on savings, they might argue that emergencies are what a credit card is for.
But as we have seen, there’s nothing like a global pandemic to knock your finances into shape.
The pandemic dramatically altered our attitude to saving and paying off debt — partly by the removal of opportunities to splurge cash, but equally the growing threat of economic recession and the impact on people’s jobs. This was enough to turn some households into full-on “thrift mode” almost overnight.
Total UK credit card debt fell to £59.8bn by the end of May, meaning the nation owing a combined 12.6 per cent less on its credit card statement than it did 12 months earlier.
That near-£10bn record payback of debt will stand people in good stead as the recession continues. At an average interest rate of 20 per cent, it will save card holders a total of £1.9bn per year in interest costs alone.
Will spending levels return to pre-Covid levels in the short to medium term? Experts are unconvinced. Howard Archer, chief economic adviser to the EY Item Club, says: “There is serious uncertainty as to just how willing and able consumers will be to spend going forward.
“We suspect that the upside for consumer spending will be constrained after the third quarter by cautious consumers, significantly higher unemployment and limited pay. On top of this, if there is any marked increase in coronavirus cases over the coming months, consumer caution could rise and weigh on shopper footfall.”
Lockdown meant that our planned holidays, home improvements and the new wheels all evaporated. Stuck at home, at least we had the time to chase refunds for our travel plans — yet another reason why paying for flights and bookings using a credit card is a good idea.
However, the plus side to people’s lives being turned upside down is that for many, their finances took a turn for the better. Many professionals have found that by working from home, they were able to generate big savings.
According to the Bank of England, households tucked away £76bn between March and July. Separate data from National Savings & Investments show that £8bn has been pumped into Premium Bonds in the past five months, with Ernie’s coffers swelling by a monthly record of £1.8bn in July alone. UK savers can hold up to £50,000 each, and if you do win a prize, they’re tax free.
However, the odds are low — roughly 1 in 24,500 according to NS&I — but as interest rates on savings accounts dwindle, investors are increasingly happy to forsake interest for a government guarantee and a shot at the £1m jackpot.
It’s refreshing to witness this level of financial prudence from UK consumers. Of course, those whose incomes have been hit the hardest — such as the self-employed, directors of limited companies and those who have lost their jobs — face a very different struggle. People coming up to retirement may also be rethinking their plans.
Although stock markets have bounced back, the UK economy is still headed for an economic recession unlike any other. Job losses have risen significantly as the furlough scheme comes to an end, and markets could easily suffer further major falls in the months ahead — particularly if the dreaded “second wave” takes hold.
Where next for our finances?
Will the budgeting mindset lead to better financial management in the years ahead? The optimist in me wants to believe that people will learn from lockdown’s effect on their finances and the way it helped them to borrow less and pay more, but I fear it’s not that simple, and much of this progress may unravel in the next 12 months.
Some have managed to squirrel away impressive sums, but if they lose their jobs, those savings will be needed.
Another factor in the nation’s future financial health is the forbearance lenders have granted — which for many is now coming to an end. According to UK Finance, 1.9m homeowners have been granted a repayment holiday on their mortgage — that’s almost one in six home loans in the UK.
Similarly, over 1m borrowers have asked for payment deferrals on credit cards, and 700,000 personal loans, helping borrowers to make ends meet if their incomes have fallen. The ability to freeze payments has proved a lifeline for these families. In the long run, though, it will see them paying extra for their borrowing.
But it’s the furlough aftermath that could end up making or breaking so many households. Some 9m workers have been helped by the chancellor’s Covid rescue initiative, but it is delaying the inevitable redundancy for some — how many end up searching for new employment will become clearer during the final quarter of this year.
What to do if you’re a ‘super saver’
For those who have been able to keep their jobs and maintain a healthier financial position — the super savers and debt slayers of the Covid era — will the upturn in their savings be maintained? The Bank of England said it believes the UK savings ratio could peak at as much as 17 per cent by the end of the year — that is steeper than in the aftermath of the 2008 financial crisis and double the 8.4 per cent rate seen in the first three months of 2020.
The government wants us to spend, spend, spend to kickstart economic growth, one of the key reasons why the base rate was reduced to a record low of 0.10 per cent in March, pushing already depressed savings returns closer to zero.
However, interest rates on some fixed cash savings accounts have started to rise, providing a glimmer of hope for savers. The numbers won’t set your heart racing, but at least increased competition among fixed rate savings providers has improved a range of best buy rates as shown by the table below:
Many readers with large cash sums have turned to NS&I, where all deposits are guaranteed by the UK Treasury (be aware that at UK banks, only the first £85,000 of your money is protected by the Financial Services Compensation Scheme). Interest rates on NS&I’s instant access Income Bonds, which currently pay 1.16 per cent gross, are among the most competitive on the market.
The government increased NS&I’s fundraising target by £29bn this year, reversing planned cuts to interest rates. Savers’ money has been flowing in, but some worry that headline rates on its most popular products could be cut if the target is exceeded.
For now, some of the more niche savings providers are being forced to remain competitive if they want to attract the funds they need for lending, hence the slight uptick in rates.
Some cash savers have opted for higher-risk products to achieve a better return. Those tempted to transfer cash Isas to peer-to-peer investment providers have seen withdrawals frozen and been forced to wait in a long queue if they want to access their cash.
What to do if you’re a ‘debt slayer’
Debt is a fact of life for most people, and with low rates on borrowing, it hasn’t felt risky to put things on plastic. However, the shock of the pandemic means many feel very differently about their debt levels.
Sue Anderson, head of media at debt charity StepChange, says: “The financial aftermath of Covid will vary dramatically between different households. If your budget allows, paying off any debts you’ve built up can help to put you on a stronger financial footing.”
“For a start, fewer outstanding credit card bills or overdrafts will improve the health of your credit score — something to bear in mind if you’re thinking of applying for other forms of credit. Paying off more than the minimum payment each month can also save on interest charges, potentially putting more money in your pocket in the long term.”
If you’re looking to transfer a credit card balance, deals are still on offer — but in most cases you will need to pay a percentage fee to switch, typically 2.5 to 3 per cent of the sum transferred.
Even before the pandemic, the number of zero per cent credit card deals and the duration of interest free periods on offer had started to fall, and has now dwindled further. In January there were more than 70 zero per cent balance transfer credit card deals with promotional periods of up to 30 months (at the peak, you could get 43 months).
Nine months on, just 51 of these balance transfer offers are available. Three providers (see table below) are offering the joint longest 28-month interest-free term, with the majority now at under 20 months.
You’ll need to have an almost spotless credit record if you want to take advantage of the best-buy zero per cent card deals. With a recession and higher unemployment looming, credit card providers are tightening their credit underwriting criteria, so getting a new card is likely to be more difficult than at the start of 2020.
Although there’s no black mark put on your credit file if you’ve opted for a repayment holiday on any of your borrowing, card providers are likely to regard this as a sign of pressure on your finances. Your card application may still be accepted but possibly for a shorter zero per cent duration and a higher APR for transactions once the interest-free period expires.
Be aware that to maintain your zero per cent status with these card offers, it’s vital that you make at least the minimum repayment on time every month. One missed date or slip up will see your zero rate terminated on the spot and your interest jump to 20 per cent APR or higher.
If you’re contemplating a remortgage, similar issues apply to those who have taken advantage of payment holidays, as lenders will look closely at your ability to afford the monthly repayments. Some lenders have withdrawn or tightened their high loan-to-value deals, limiting your options. HSBC last week capped lending for new borrowers at 85 per cent LTV until further notice.
If you’re looking to refinance your borrowing — be it card, personal loan or mortgage — I recommend you get your application in as soon as you can.
Andrew Hagger is a personal finance expert and founder of consumer website MoneyComms.co.uk
How our spending habits have changed
FT Money asked Starling Bank, one of the new digital challenger banks, for some insight on how our spending patterns have changed during this year.
Not surprisingly, travel and transport were among the hardest hit areas of spending. Transport for London recorded a 95 per cent drop in spending during lockdown, although it has since bounced back to 60 per cent of pre-Covid levels.
However, the fear of using public transport has also boosted applications for car finance by nearly 25 per cent in July and August compared with a year previously, according to separate data last week.
Starling found transactions with airline Ryanair fell 95 per cent during lockdown, although spend has now recovered to almost 30 per cent of pre-March numbers. Airbnb was another casualty, with an 86 per cent drop in transactions during lockdown, which Starling said has only recovered by around 7 per cent since.
However, food sales have soared. Spending at Tesco increased by 60 per cent during lockdown, while upmarket rival Waitrose was not far behind with an uptick of 42 per cent, both fuelled by increased demand for home delivery services.
Takeaways were popular too: Just Eat transactions increased by 20 per cent during the past few months.
Internet shopping won hands down over the high street: Amazon spending jumped 82 per cent in lockdown, with an 18 per cent increase in average transaction values.
Anne Boden, chief executive and founder of Starling Bank, said the data indicated some “green shoots of recovery” in transport, travel and high street shopping. “We mustn’t think we are out of the woods, but we are going in the right direction,” she said.