United kingdom Daily news: Credit card lending plummets

Credit card lending plummets

By Andrew Oxlade

PUBLISHED: 07:55 EST, 30 May 2012 | UPDATED: 11:58 EST, 30 May 2012

Credit card lending has contracted by the biggest monthly amount since 2006, Bank of England figures showed today.

Borrowers appear to be finally paying down some of what is owed on plastic - but the figures appear to show a switch to more borrowing on loans.

And it also unclear how much of the fall in card borrowing is down to banks merely writing off the money. Separate Bank of England data shows an average Â£6million has been written off every day this year.

Flexible former friend: Borrowers are opting for loans rather than credit cards

The Bank of England figures today showed the amount owed on credit cards fell by Â£118million in April, the largest drop since August 2006, when it fell by Â£152million.

Total owed on credit cards has nudged lower by Â£600million lower this year, from Â£55.6billion to Â£54.99bn.

The amount written off on credit cards was Â£568million.

The fast growth of 'bankruptcy light' options, such as Individual Voluntary Arrangements (IVA) and Debt Relief Orders (DROs), has made it easier for borrowers to walk away from relatively small amounts of debt.

The campaign group Save Our Savers (SOS) has previously estimated that between 2008 and the end of last year, an 'ext raordinary' Â£13billion of credit card debts was written off.

It concluded that despite the widely held belief that debts were being paid down, borrowing on plastic had continued to 'run rampant' rising from Â£53.3billion to Â£56.5billion over that time.

Total consumer debts for the UK still stand at nearly Â£1.5trillion and have barely budged during the crisis. Despite it being one of the worst levels of borrowing in the world, the Office of Budget Responsibility expects the figure to race ahead to Â£2.12trillion by 2015.

With banks tightening the purse strings, borrowers with the worst credit histories are likely to borrow money elsewhere.

Indeed, today's figures showed other types of lending, which includes personal loans and payday loans, rose by Â£400million.

It was a more subdued increase than the Â£500million rise seen in March, leading some experts to suggest the appetite for borrowing was being stifled by Britain's worsened economic situation.

'It is very possible that increased worries over the outlook resulting from news that the economy is back in recession and from the situation in the eurozone is intensifying the desire to improve personal finances,' said Howard Archer, an economist at forecaster IHS Global Insight.

But far from signalling a fresh determination to get to grips with sky-high debts, it may be that desperate borrowers are being forced to turn to payday lenders, which offer loans over short periods but at punishing rates of interest.

Feeling the pinch: Lending on credit cards has continued to rise throughout the crisis but the rate of growth has slowed to nothing

Lending to consumers grew by as much as 20% a year during the boom years before slowing to a trickle. Growth, however, has ticked back up during the crisis as consumers are forced to borrow to make ends meet

A recent PricewaterhouseCoopers (PwC) report argued that credit card use could fall into permanent decline, with the rise of digital technology and payday lenders changing how people access credit.

That report argued that the innovation and convenience offered by 'alternative lenders' such as high interest payday loan companies was encouraging a broader selection of consumers to choose their services over banks.

Melanie Bowler, an economist at Moodyâ€™s Analytics, said: 'Households are favouring paying down debt, rather than undertaking new borrowing. Demand for credit will remain contained through 2012 amid lingering job security concerns.

NEW RULES FOR PAYDAY LENDERS 'FALL SHORT'

Â Payday lenders have agreed to freeze interest and charges for customers in financial difficulty.

They must also tell customers three days before taking money from their accounts to repay debts, under new reforms agreed with the Government.

And the days of instant loan approvals may be over as lenders will be forced to perform tougher credit and affordability checks to see if customers can repay their debts.

But debt charities have attacked the plans, due to come into effect by July 25, saying they donâ€™t go far enough.

â€˜The new measures fall short of providing suitable protection for the many people affected by the bad practices of payday loans companies,â€™ says Joanna Elson, chief executive of the Money Advice Trust.

Payday lenders are already licensed by the Office of Fair Trading and must comply with its irresponsible lending guidance rules.

But Ms Elson says payday lenders 'repeatedly fail' to follow this guidance and voluntary codes will be just as ineffective.

'Interestingly however, there has been something of a boom over the past year in demand for relatively new payday loans, which offer short-term loans designed to be repaid typically within a month-and-a-half.

'With these bridging loans offering exorbitant repayment rates, the risk of UK households actually falling deeper into debt is increasing.'

Some consumers have been forced into the arms of payday lenders, which commonly charge interest of between 1,500 per cent up to 4,000 per cent, because banks, rocked by the financial crisis, have tightened up their lending rules.

The Bank of England figures also provided further evidence that people are having a tougher time taking out a mortgage, as approvals remained way below their long-term average.

There were 51,823 approvals for house purchase in April worth Â£7.6billion, a 1.5 per cent increase on the previous month, but still under the previous six-month average of more than 53,000 approvals.

The figures have been modestly creeping up after hitting a seven-month low in February, just before a two-year stamp duty holiday for first-time buyers ended the following month.

The Bank of England expects lenders to tighten their credit criteria further in the coming months amid the weak economy and the eurozone crisis, making it harder for people to meet the requirements to take out a mortgage.

Remortgaging approvals also rose last month to 31,214 approvals worth Â£4.3billion, the highest figure since January and nudging slightly above their six-month average.

Analysts have suggested that recent remortgaging increases have been due to concerns from homeowners that lenders are set to put their mortgage rates up further following a spate of recent announcements about rises. [When will rates rise?]

More than a million homeowners saw their mortgage rates increase at the start of this month, with lenders blaming the weak economy and the increased cost of funding a mortgage.