Credit Card Borrowing Up As Struggling Nation Relies On Plastic
The British are increasingly relying on credit cards for buying power as incomes fall in the wake of the financial crisis, draining savings and leading experts to fear for borrowers' financial stability.
In the first few months of this year, the United Kingdom's gross amount of credit card borrowing climbed to territory last seen in mid-2008, when a historic debt burden helped drag the UK into recession, data from the UK central bank show. But this time, the borrowing isn't to fund extravagant purchases by consumers hungry to live beyond their means, economists say.
Instead with finances tight, people are spending less, even as their use of credit cards grows. The nation, still beaten from an economic downturn, has turned to cards to purchase the basics, items like food and travel. And credit card companies seem happy to oblige: after a period of tightening standards in the wake of the recession, lenders are once again extending competitive offers.
"It's catching up again. You're receiving new offers in the mail," said Juan Licari, senior director of credit analytics at Moody's Analytics in London. Credit card companies, he added, may be "going aggressive again, and building up the portfolio."
As in the United States, residents of the UK became addicted to leverage in the years leading to the financial crisis, as borrowing became a way to grasp luxuries beyond what income levels would allow. Both countries reduced their burdens in the years after the crash, with borrowers attempting to pay back loans and banks charging off bad debt.
In recent months, though, the UK has seen elements of the former lending environment re-emerge, and experts say this level will increase further. The gross volume of credit card borrowing by individuals in the UK increased nearly 4 percent during the year to the end of May, the most recent month with data available, according to the Bank of England.
The growth in this expensive form of borrowing has been uneven. The May total of £11.2 billion marked a 1.5 percent decline from April, when the figure was near its post-recession high. Bank of England figures showt the average credit card interest rate for households in May was 16.72 percent.
What's different this time is that consumers are hurting. Half of households reported a decline in monthly available income during the year that ended last September, according to a survey commissioned by the Bank of England. Only 14 percent said their income had risen.
And yet overall spending fell during the first quarter of this year, with some of the biggest declines coming in clothing, footwear and housing, the UK's Office for National Statistics said in a recent report. Spending on basic staples, meanwhile, went up.
"The overall picture is one of consumers really feeling the squeeze," said Chris Crowe, an economist at Barclay's Capital in London. "Consumers simply are tightening their belts and trying not to spend so much."
But as spending falls and credit card borrowing rises, folks in the UK are putting away less money in savings, likely indicating they're contending with mounting debt payments. UK households put aside 4.6 percent of their disposable income for savings during the first three months of this year, compared to 6.2 percent during the same period last year, the Office for National Statistics said.
So, even as the gross level of lending has risen, wary borrowers are being diligent. Which is eating into their spending power.
Indeed, the volume of bad credit card loans that banks wrote off in the first three months of this year was down 31 percent compared to the same period last year, Bank of England data show.
It's a welcome development for UK banks, which reduced credit card limits in the months after the financial crisis amid concerns that borrowers needed to be reined in. Now, the aggressive card offers are starting to return.
Lenders reported an increased appetite for taking risks during the first quarter on so-called unsecured lending, which includes credit cards, a recent Bank of England survey said. These institutions expected that trend to continue, with many noting "competitive pricing and offers," the central bank said.
The current climate of declining delinquencies and losses, moreover, may seem like an attractive opportunity to credit card companies, said Licari, of Moody's Analytics. He warned of the cyclical nature of delinquencies, as lenders make credit more available.
"A wave of delinquencies and losses may come, due to the aggressive lending they're doing now," Licari said.
"That's the way they move," he added, referring to credit card companies. "When delinquencies are very low, and losses are very low, they go ahead for increasing market share."