Consumers continue to repay overdrafts

Consumers are continuing to tackle their personal debt by paying off loans and overdrafts, new figures have revealed.

Research by the Building Societies Association (BSA) has found that balances held in savings accounts at building societies reduced by £0.6 billion in November 2009.

This corresponded with current account holders using their savings to wipe off £379 million of debt during this month, according too Bank of England statistics.

However, as consumer debt, including current account overdrafts, decreased overall, lending by credit card companies increased by £0.2 billion, suggesting that consumers are shifting the location of their debt.

Ed Bowsher, a consumer finance expert, explained that consumers are striking a tactical balance between clearing debt and saving, based on interest rates.

He said: "It is partly a general thing that people are focusing on paying down debt rather than saving because the rates you will get on your savings accounts are so low at the moment people think it is better to pay off debt and they will be in a better position when rates do go up.

"They will have less debt and will be paying less interest on that debt."

Recently published Bank of England statistics have revealed that lending to individuals fell by £0.4 billion in November, which was weaker than the previous six-month average of a £0.2 billion fall.

However, statistics published by creditaction on earlier this year told a different story. The organsation found that total UK personal debt at the end of November 2009 stood at £1,459bn, which represented a 12-month growth rate of 0.7 per cent.

The independent debt charity revealed that the average household will need to spend approximately 15 per cent of its net income to cope with the average it's interest on the debt level of £2,621.

Mr Bowsher said that tackling debt, such as overdraft rates on current accounts and outstanding loans, now will put consumers in a better position on the long run.

He urged consumers to pay off their debt before interest rates rocketed.

"People don't realise the damage that the high interest can do, how long it can take to pay off debt when you are paying a 20 per cent interest rate because it is 20 per cent each year," said the consumer finance expert.

"It can take years and years to pay off credit card debt as a result. Just try and get rid of it as quickly as you can."