Credit Card Loans Shrink in April

25th June 2012  

According to the latest figures from the Bank of England, borrowing on credit cards contracted sharply in April. In fact, it was the largest contraction since August 2006, suggesting that consumer confidence remains in the doldrums amidst fears over job security and the overall health of the economy.

The Bank of England’s ‘Statistical Release’ at the end of May shows that credit card lending decreased by more than £100m in April, despite having increased by £200m the previous month. However, this latest figure is in tune with the general trend over the past six months, four of which have seen contractions.

The downward trend does not seem to be affecting other forms of consumer lending though. The total amount of lending (which includes loans and other forms of advances, as well as credit card lending) increased by £1.4bn in April. Mortgage-based lending grew significantly within this, with ‘lending secured on dwellings’ increasing by approximately £1.1bn.

Why is credit card lending decreasing?

So, in the context of increases in other forms of borrowing, why is credit card lending apparently falling out of favour at the moment?

For one thing, the media may have influenced consumers to pull back the reins on casual credit card spending, especially for those impulse buys on the high street, and by raising the spectre of a double-dip recession and other financial things that go bump in the night. At the moment, the general consensus from the man and the woman on the street is that ‘times are hard’, with little sign of an upturn in the UK’s economic fortunes any time soon. Regular news stories featuring mass redundancies and yet more well-known names going into administration also do little to encourage carefree credit card spending, either.

Of course there is every reason for being cautious right now, and after a concerted ‘education’ over the perils of getting into credit card debt, consumers are far less willing to throw caution to the wind and spend money they don’t have. In return, the lenders are less likely to offer consumers the keys to the financial kingdom in the form of a high credit limit. This overall decrease in credit card lending may suggest that while people continue to spend on their credit cards, they are being far more prudent about how they do it. Many are spending smaller amounts that they can then pay off at the end of the month, with little risk of exposing themselves to substantial levels of debt. And in the long term that prudent approach could actually be a good thing for the financial health of the nation.

Speaking to the BBC, William Hunter, a financial expert at Hunter Wealth Management commented

“A cautious approach to credit card debt in the current climate is no bad thing. Many households have a fair amount of debt already and so a move away from credit card debt is far more sensible than ‘maxing out’. “

How might credit card providers respond?

Despite the initially gloomy headline, this story may well turn out to have a silver lining after all. With banks and credit card providers experiencing a lull in credit card lending, coupled with competition from ‘payday loans’ and other sources, they may strive to offer more attractive terms and rates in a bid to encourage more people to turn to their plastic friend. This in turn may result in increased competition between credit card providers, leading to highly appealing card offers and, eventually, once the storm clouds of recession have cleared, a subsequent increase in credit card spending.

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