Households’ consumer credit borrowing shrunk by 3% annually in May, marking the weakest growth since records started in 1994, according to Bank of England figures.
The 3% contraction, which includes borrowing using credit cards, personal loans and overdrafts, follows a 0.4% 12-month fall in April.
Within May’s figure, the annual growth rate of credit card lending was negative for the third month running, falling to minus 10.7%, compared with 3.5% as recently as February.
Growth in other types of borrowing remained positive, at 0.7%.
The Bank’s Money and Credit report said Covid-19 continued to weigh on spending in May as households repaid more in loans from banks overall than they took out.
The number of mortgages approved to home buyers in May also fell to the lowest number since the Bank started tracking the mortgage approval figures in this way, at 9,273.
This was around a third of the trough during the financial crisis in 2008.
Meanwhile, cautious households continued to shore up their savings.
Households’ deposits increased by a record £25.6 billion in May, following strong increases in March (£14.3 billion) and April (£16.7 billion).
In the six months to February, household deposits had increased by an average of £5 billion per month.
The Bank also said the typical interest rate paid on people’s deposits fell in May, to 0.87% on new deposits and 0.29% on outstanding deposits.
Meanwhile the typical rate some borrowers were paying became cheaper.
Typical rates on new personal loans to fell to 5.10% in May – the lowest since these records started in 2016, and compares with a rate of around 7% at the start of 2020.
The typical cost of credit card borrowing also ticked down, from 18.54% in April to 18.36% in May.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “Households’ spending likely will rebound over the summer, as some recently accumulated cash is spent in reopened shops and businesses.
“Nonetheless, employment looks set to decline in the autumn when the Government’s income support schemes are set to be wound down, while low consumer confidence suggests that households will seek to save a larger proportion of their incomes than they did pre-Covid.
“Accordingly, we continue to think that households’ spending will still be about 5% below its pre-virus peak in quarter four, even if a second wave of Covid-19 is avoided.”
Mr Tombs said the further drop-off in mortgage approvals for house purchase in May is “not a real shock”, given that the housing market has only recently started to gradually reopen.
He continued: “Indicators of buyer interest, such as the number of people browsing property websites, have fully recovered to pre-Covid levels in recent weeks, suggesting that mortgage approvals will pick up in June.”
But he added: “Lenders have become much more cautious, removing high LTV (loan-to-value) loans from the market and refusing a larger share of loan applications.
“Accordingly, we still expect mortgage approvals to finish the year down 10% year-over-year and look for a 5% peak-to-trough fall in house prices.”
Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “Covid-19 has had a devastating impact on the mortgage and property markets, so it is no surprise that lending was weak in May, with approvals for house purchase falling.
“With lockdown meaning that lenders were unable to send valuers out to physically view properties, the number of mortgages approved fell considerably.
“Lenders were kept busy processing mortgage payment deferrals and trying to get to grips with staff working from home rather than call centres, meaning it was far from ‘business as usual’.”
But he said that with lenders starting to clear their backlogs, “we expect mortgage approvals to pick up”.