Credit card usage has increased but ‘early signs of deterioration’ show repayment dangers

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CREDIT card usage increased in the UK throughout June and July according to FICO’s latest UK Credit Market Report. However, worrying first signs of deterioration are beginning to emerge.

Credit card payments are monitored by FICO who utilise data from the UK’s leading credit card issuers. This data is analysed through the organisations benchmark reporting service, which has revealed how coronavirus continued to affect consumers throughout June and July.

Stacey West, a principal consultant for FICO Advisors, introduced the findings with the following comments: “Whilst we are seeing very low early-stage delinquency rates (missed one or two payments), we know that payment deferrals and furlough payments are masking the true scale of the financial stress experienced by many UK adults.

“Once these arrangements come to an end, mortgage and loan payments will be the higher priority, which is likely to mean the impact on credit card payments could be significant.

“It is worth noting that historically, accounts that are more than five years old have been the lowest risk segment.

“However, there are signs they could be the most impacted as a result of COVID-19 so we will be monitoring this. Early signs of deterioration were seen in July for one-missed-payment rates.”

Overall, the report revealed that consumer confidence is starting to recover and that the economy could be beginning to track higher.

The research highlighted that:

  • Spending on UK cards started to increase in June, up 13 percent on May and then by a further 11 percent in July.
  • Card usage also began to stabilise. In line with the increase in average spend, the percentage of active accounts started to stabilise and marginally increased in both June and July, although it is still six percent lower than in July 2019.
  • Coronavirus themed refunds, though undoubtedly disappointing for travellers, boosted how many accounts remained in credit. The percentage of accounts in credit (have excess funds) and the average amount in credit continued to increase in June, although there was a drop in July. The percentage of accounts in credit fell by two percent and the average balance by two percent. Accounts in credit are still 34 percent higher than a year ago and average balance is 108 percent higher than a year ago.
  • Additionally, the percentage of over limit accounts continued to drop in both months, although the rate is slowing. It was 41 percent lower than a year ago. However, for those accounts that are over their limit, the average amount continues to increase and is 32 percent higher than a year ago.

Despite some of these positive signs, Stacey went on to warn that as the benefits of payment freezes and the like reduce, consumers may start to struggle once again.

As she explained: “Over the coming months, if the number of consumers deferring their payments remains stable or increases, more will exceed their limit as interest is applied with no corresponding payment.

“Combined with some consumers reducing their payment amounts, and the increasing number of accounts that would have qualified for a higher credit limit prior to the pandemic also starting to breach the limit, there could be a higher proportion of accounts qualifying for persistent debt treatment.

“Issuers will, therefore, need to respond with different strategies for this group of customers.”

As payment deferrals end, consumers may also find themselves struggling to afford their repayments.

June saw further decreases in the early delinquency (missed one or two payments) levels but missed payment levels then went on to increase in July.

Stacey revealed that this could be an early warning sign, as she detailed: “The increase in accounts with one missed payment in July could be attributed to the first significant wave of expiring payment deferrals and consumers finding themselves unable to resume payments.

“The coming months will show the full impact.”

Credit cards and other consumer credit products were awarded payment freezes by the FCA towards the beginning of the year, following the announcement of mortgage holidays.

Payment holidays of this nature can be requested and utilised up until October 31 2020, the same time that many of the governments support schemes will also be closing.

According to guidance issued by the FCA, when a payment freeze comes to an end the lender involved should get in touch with the customer to let them know of the next steps.

The FCA detailed that if the holder can start to make repayments, in full or in part, then it is in their best interests to do so, given that this will tackle the problem of added interest early.

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