Credit card right offs hit £3.6bn in 2011

4th March 2012  

If you often wonder why interest rates on credit cards seem so much higher than on secured loans and mortgages, the answer is because in the last few years, a lot of people haven’t been able to pay their credit card bills leaving card issuers to right off huge sums against their profits.

Beleaguered UK credit card lenders had to write off a massive £3.6 billion worth of bad debts last year. With wage freezes hitting hard and family budgets tightened so much they practically squeak, paying off the credit card has dropped as a priority for many cash-strapped borrowers, who would rather risk a bad mark on their credit rating than miss a mortgage or rent instalment.

The result has been that lenders are now more careful about issuing new cards, worried as they are about the number of UK adults who may still be in an insecure job, or only holding on by their financial finger nails. Many card issuers have brought in risk based pricing, meaning they offer new credit card applicants an interest rate that they think fits their potential risk of defaulting based on their credit history and credit score. Only the top 51% of applicants get offered the headline advertised deals.

Although the bad debt figure for 2011 was actually down on the previous years’ numbers (a whopping £5.32 billion in 2010 and £4.12 billion in 2009), it still meant that around 7% of all outstanding debt on the nations credit cards was written off as unrecoverable. That’s a big hole in the card issuer’s bottom lines, and shows how far the ripples of 2007 – 2009 recession have reached.

The credit card ‘long game’

The feeling is that both lenders and borrowers are playing the long game – credit card lenders have become more reluctant to lend and borrowers are thinking twice before taking out a new credit card. That should mean that once this year is over, we should start to see the level of bad debt drop again back to the more consistent £3billion figure of years past. Hopefully…

Its now common knowledge that major lenders have become very choosy about whom they lend to, and a spotless credit record is now a must-have for anyone wanting to take advantage of the best 0% balance transfer and purchase cards. There are some pretty generous offers around at the moment (22 months interest free is enough to tempt even the most reluctant borrower to make a play for a new Barclaycard, for example). But actually getting your hands on one of these little beauties is almost impossible unless your credit rating is purer than the driven snow.

However, if it’s going to be harder to get a credit card in the first place for the next few months, that will mean that the amount of debt per head will actually decrease over the next 12 months. Once that stabilisation point has been reached, you will start to see the lenders relax a little and be more forthcoming with their approvals.

High card interest rates do scare a lot of potential borrowers away. The current average on a credit card is 17.3%, the highest average rate in more than 11 years. Customers who are considered more of a risk are getting hit with rates that are more than double that average. Banks responsible for some of the big credit cards are also having to deal with a pounding in their profits from the mis-selling of PPI fiasco, and the ever-present problem of refunding customers who have been the victim of fraud.

All of this means that there is less money in the pot, so it is inevitable that potential new customers are going to work harder to persuade the lenders that they’re a safe bet. All eyes now are on the country’s yo-yo growth figures and just how stable the jobs market is. The banks and card issuers DO want to lend, its how they make their money – but the recession has made them very risk averse.

Clearly is mainly outside factors are effect the lenders’ decision to put a stop on the line of credit for all but the most dependable of customers. However, with reports that more people are relying on their credit cards to cover household bills rather than little ‘treats’, the situation could get worse before it gets better.

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