Personal debt falls by £500 million!

This year, total personal debt has fallen for the first time since at least 1993. How and why have we cut back on borrowing?

When it comes to borrowing, our American cousins simply cannot be beaten. Indeed, almost two-thirds of all money lent worldwide in 2007 was borrowed by US individuals, companies and their government.

When debt exploded

Then again, we Brits are right up there with the world's best (or worst!) borrowers. Take a look at the following table, which shows how our personal debt has grown since 1993:

Source: Bank of England

As you can see, during the peak borrowing binge of 2002 to 2007, personal debt rose by more than £100 billion a year. Indeed, in the 15 years from 1993 to 2008, it grew by £1,046 billion -- that's more than a trillion pounds!

In other words, our personal debt more than tripled in 15 years, rising by 255%.

Of course, we all know the chief reason behind this massive increase in our debt burden. It's mostly down to the housing boom. As house prices soared between 1995 and 2007, we saw a vast increase in mortgage debt (see the second column of my table).

This is entirely predictable, as rising prices force people to borrow ever-larger sums in order to move up the housing ladder.

Sadly, our non-mortgage debt - such as overdrafts, store and credit cards, and car and personal loans - also exploded. At the end of 1993, consumer credit stood at £54 billion. Fifteen years later, it hit a peak of £233 billion; that's an increase of 335%.

Today, our non-mortgage borrowing is 4½ times as large as it was in 1993. That's some over-spending habit!

We have turned the corner...

In 2008, our personal debt grew by £50 billion, which was the smallest annual increase since 1998.

However, something quite remarkable has happened this year. In the first seven months of 2009, our total personal debt has fallen by exactly half a billion pounds (£500 million). I've been monitoring debt statistics since the early Nineties, and I can tell you that this is the first proper drop since the Bank of England started producing the above data in 1993.

While mortgage debt has risen slightly this year, what we owe on consumer credit has fallen by £2.2 billion. What this means is that our non-mortgage debt is down about 1% on the start of the year.

In other words, we've cut back on our spending, stopped borrowing more and more money, and started repaying what we owe.

To me, this is a remarkable development. In the past seven months, instead of digging ourselves deeper into debt, we've actually repaid a small slice of our borrowing.

This is something I've been waiting for since I started out as a financial writer seven years ago. Hence, you can understand my excitement at this development!

...but will it last?

Alas, I'm not so sure that this recent trend towards repaying debt will continue for long.

Clearly, some adults have made a conscious, voluntary decision to stop 'doing debt'. These people have had their 'light-bulb moment' by realising that they cannot go on spending tomorrow's money today.

They have decided to live more modestly now in order to build a better future.

However, for most British borrowers, the decision to cut back on credit has been forced on them. The toxic combination of a credit crunch, housing crash, banking collapse and economic recession has left lenders terribly short of precious capital to lend.

Thus, I suspect that the decision to cut back on credit is really about UK lenders' reluctance to lend to anyone without a first-class credit history.

Indeed, I believe that Britain's appetite for a debt-fuelled lifestyle remains fairly strong, especially among young adults. Given half a chance, I'm sure that millions of us would resume our habit of living beyond our means through borrowing.

Still, for now, our debt mountain is shrinking, which is a step in the right direction.

In summary, although personal debt has fallen this year, I don't expect this trend to continue for too long. As banks rebuild their bombed-out balance sheets, they will be pushed to lend more, kick-starting another borrowing binge.

My advice to you would to resist jumping aboard the next credit and housing bandwagon - if you don't want to be a victim of the next bust, that is!

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