Credit card spending at 6 year low

18th January 2011  

A new survey out yesterday revealed that credit card spending was a mere £97bn in 2010, the lowest figure since 2005. Credit card borrowing dropped by an average £500 per household, and with the borrowing habits of consumers changing it looks to be a challenging year for credit card providers.

The annual ‘Precious Plastic report‘ from accountants PwC shows that consumer borrowing fell by £6bn in 2010 to £1.45 trillion. Secured borrowing grew slightly last year to around £1.24 trillion but the Bank of England has confirmed that the fourth quarter of 2010 saw a significant decrease in mortgage lending by banks and that we can expect this figure to decrease again in 2011.

There has been a significant drop in unsecured borrowing with outstanding balances down some £13bn to £214 trillion, a trend the report indicates is due to continue.

The survey indicates that the reason for the decline is partly the increasing cost of borrowing, despite interest rates remaining at their lowest rate for a generation. The study’s authors have indicated that they expect the interest rates charged by credit card companies to rise by 3% over the next five years meaning the average household will have to find an additional £1,800 a year just to service interest payments on existing borrowing.

The number of credit cards in circulation fell by 1.5 million when compared to 2009, the lowest level since 2003. Those consumers wanting to borrow are finding it challenging to obtain credit as mainstream lenders concentrate on cutting losses and revising their lending criteria to concentrate on those with a strong credit history. The report adds that the squeeze may tighten further as lenders re-focus on identifying and lending to the much vaunted ‘profitable customer’ and reducing costs in the back office”

Richard Thompson, a Partner at PwC said

“January is traditionally the time of year when people reflect on their financial situation and our research shows that consumer confidence is still weak. In fact, some 40% of respondents still expect their pay to be reduced or frozen in the coming year. Consequently, households are seeking to reduce the amount that they borrow.

“These worries are driving consumers back to ‘jam jarring’, whereby they shun large loans and open ended credit cards in favour of smaller, shorter term borrowing for a particular purchase, in an effort to control their borrowing.

“There is strong evidence that the type of credit demanded by consumers is changing. Point of sale finance products, payday loans, home credit providers and pawnbrokers will all play their part in providing for these kinds of consumers, but the cost of credit needs simpler explanation for consumers.”

As further regulation of the personal finance industry comes into force with the last date for compliance with the Consumer Credit Directive only 2 weeks away, there’s talk in the market of interest rate caps. Whilst this may help to reduce the number of lenders exploiting consumers with unjustifiable interest rates, it may also lead some credit card issuers to consider that the provision of credit via some of its products is no longer viable.

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