The challenges of household debt in Luxembourg: personal loans and the use of credit cards. Photo: Shutterstock

The challenges of household debt in Luxembourg: personal loans and the use of credit cards. Photo: Shutterstock

On Wednesday 8 November, the Central Bank of Luxembourg published a study on household finances and consumption habits. The study highlights that Luxembourg holds the European record for consumer debt, mainly among low-income households, according to the International Monetary Fund.

According to data from the household finance and consumption survey (HFCS), used by Luxembourg’s central bank (BCL) in its , 35% of households in the grand duchy have consumer loans, while 31% have mortgage debt. In addition, more than 13% of households have both types of debt.

The main component of these loans is personal loans, held by 26% of households. This figure is six percentage points higher than the eurozone average of 20%. Strikingly, the average level of these loans is twice as high in Luxembourg as in the eurozone. For the least wealthy 20% of households, the figure is even three times higher than the eurozone average.

The author of the study, Giuseppe Pulina, partly explains these differences by the higher income levels in Luxembourg, where interest charges on personal loans are also tax deductible. On average, personal loans only account for 16% of gross household income in Luxembourg, a figure comparable to the eurozone average of 17%. What’s more, 70% of Luxembourg households take out personal loans to finance the purchase of a vehicle, a significantly higher proportion than in the eurozone, where it stands at 38%.

The study shows that the level of personal loan indebtedness is generally higher among households with a higher level of education, but fewer of them have taken out a personal loan. The likelihood of holding a personal loan is higher among households where the reference person is an employee rather than self-employed or unemployed.

Credit cards, another component of indebtedness

According to the BCL, another significant component of consumer debt is the use of credit cards. In Luxembourg, nearly 84% of households have credit cards, almost double the eurozone average. Only 5% of households use these cards to accumulate debt, both in Luxembourg and in the eurozone.

The likelihood of owning a credit card increases with household income and level of education. This probability increases among households that consider themselves to be subject to credit constraints, which concerns around 7% of households, whether they live in Luxembourg, in neighbouring countries or in the eurozone. Credit constraints are less frequently mentioned by households on higher incomes or of a more advanced age.

According to 2018 HFCS data, more than 90% of households with credit card debt had positive balances on their bank accounts. Over 70% of these households had the financial means to repay their credit card debt. However, this behaviour may ‘seem irrational’ according to the author of the study, when the high interest rates associated with credit cards are compared with the meagre returns generated on current and savings accounts. The results suggest that this behaviour can be explained by differences in risk aversion and fear of a future credit crunch.

This article was first published in French on . It has been translated and edited for Delano.