As we transition from the pandemic to the cost-of-living crisis, is there anything we can learn from how the 2008 financial crisis impacted credit card usage? In 2011, the Consumer Credit Directive & 5 Consumer ‘Rights’ were implemented to increase customer protection. Move forward to 2018 and the focus was around supporting customers in persistent debt. Then, in 2021 the FCA set out guidance on fair treatment of vulnerable customers and have just confirmed plans to bring in a new Consumer Duty, which will set higher and clearer standards of consumer protection across financial services and require firms to put their customers’ needs first.
As a result of these moves and other changes, UK households entered the cost-of-living crisis stronger than before the financial crisis. Since 2010, there have been many regulatory changes affecting credit card usage, with the aim to control bad debt and protect customers struggling financially. As a result, the percentage of customers missing credit card payments is a lot lower now than in 2008 and the percentage of payments to balance is also significantly higher.
- Average card sales per month dipped during the 2008 financial crisis and during the pandemic, then rose sharply;
- Percentage of payments to balance has risen steadily since 2008 and more sharply in the past year, and
- The average card balance is lower than at any point since 2006 but as the percentage of payments to balance is expected to reduce, this will increase the average balance. As spend decreased during the financial crisis we saw a rise in overall average balances with an increase in missed payments also seen.
Three Trends to Watch:
- The percentage of customers missing one payment is slowly starting to rise and is expected to increase over the next few months if the cost-of-living crisis continues
- Over the next few months, the average unpaid balances are expected to rise, with a subsequent knock-on effect to the overall average balance
- If unemployment rises in the next few months, this would make crisis spending on cards more likely, and could lower the percentage of balance paid each month.
The pandemic enabled many consumers to save more as the lockdowns drastically reduced the ability to spend. Consumers were able to pay more off their outstanding balances and the average balance decreased in the first lockdown by £100 between March and June 2020.
In the months after restrictions ended, sales increased to a high of £760 in December 2021, with continued strong percentage of payments to balance. Although the average balance is still nowhere near pre pandemic levels, it had increased to £1,557 by May 2022.
Today though, inflation is at a 40 year high at 9%; primarily driven by a surge in energy costs. In 2008, it reached a peak of 4.5%. We are seeing a fall in real wages with living standards falling at the fastest pace in nine years and consumer confidence is at its lowest level since records began in 1974; even lower than in 2008.
Currently, the UK has a shrinking labour force which will impact output. Unemployment is at its lowest rate since 1974 whilst in 2008 it was much higher. However, as the cost-of-living crisis takes hold, unemployment is expected to rise in the next few months as incomes reduce, therefore impacting demand.
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If we look back to the years leading up to the 2008 financial crisis, and the intervening years since, we can see how these events influenced spend, balances, payment rates and missed payments.
Before the financial crisis of 2008-2009, average spend had been steadily increasing with the same increasing trend seen before the pandemic hit. During 2008-2009 and in the first year of the pandemic, spend dropped with a higher decrease during the pandemic because of the restrictive lockdowns. Increased savings and the relaxation of restrictions resulted in a steep increase in spend between 2021-2022 but if we look back to 2009, this uptick in spend was also seen and continued up until 2012.
Improved consumer protection
At this point, regulations were being implemented giving the consumer more “rights” and improved customer control. This impacted credit card limits as issuers were not allowed to automatically increase a customer’s credit limit but had to offer the increase and greater emphasis was placed on whether the customer could afford this increase to their limit. Whilst financial institutions were adapting their rules, some stopped limit increase programs altogether and this resulted in lower overall average limits and affected average spend. Once financial institutions were compliant with the new regulations, strategies re-started and limits and spend began to slowly increase again.
During the financial crisis and starting to be seen now, consumers are spending less on higher value goods and average spend dropped from £760 in April 2022 to £753 in May 2022. As the cost-of-living crisis continues and with many consumers tightening their belts, it is expected that spend will continue to drop; just as was seen in 2008 but perhaps not as quickly as unemployment is currently still low.
Percentage of Payments to Balance
This is currently at an all-time high with over 40% of the balance being paid each month and has risen by 10% since just 2021, again because many consumers having more savings they can tap into. This percentage has been increasing steadily over the past few years but back when the financial crisis hit, around 25% of the balance was being paid each month. Over the next few months, it is expected that this percentage will drop, and this will affect average credit card balances. Will the practices necessary to manage persistent indebtedness cause a false impression if more customers are forced towards minimum payments and are therefore moved out of cards to other products, or migrate to using BNPL?
Since the pandemic hit, the average balance is lower than at any point since 2006 but as the percentage of payments to balance is expected to reduce, this will increase the average balance. As spend decreased during the financial crisis we saw a rise in overall average balances with an increase in missed payments also seen.
Number of Customers Missing Payments
Missed payments will impact the overall average balance. Currently, the percentage of customers missing one and two consecutive payments is low and this has been steadily decreasing for many years, even during the 2008 financial crisis. In 2006, just under 6% of accounts had missed one payment. In 2008 it was 5.25% with 4.62% in 2009. Before the pandemic there were 2.37% of accounts missing one payment.
Regulations focusing on customer affordability and persistent debt have helped to control and support customers showing signs of financial stress over the last few years. During the pandemic, this percentage dropped even further; down to 1.5% and helped by well publicised payment holiday support. However, the percentage of customers missing one payment is slowly starting to rise and over the next few months as the cost-of-living crisis continues, is expected to increase.
Average Amount of Missed Payments
Although the percentage of customers missing payments continued to decrease, even during the financial crisis, the average balance of these missed payments significantly increased between 2008-2009 as the recession of 2009 took hold. Between 2010-2015, missed payment balances decreased significantly and although they increased steadily between 2016-2020; in 2022 the average balance of one missed payment is £2,000 which is £900 lower than in 2009. Payment holidays helped to keep missed payment balances low during the pandemic but over the next few months, these balances are expected to rise, with a subsequent knock-on effect to the overall average balance.
Regulations implemented in the intervening years since the financial crisis and recession of 2008-2009 have helped to increase customer protection, ensuring customers are treated fairly and advice is given clearly. Consumers now have more control over changes to their credit card limit, given advance notice of any interest rate changes and have better ways to pay off their balances. More recently, the focus has been around supporting customers in persistent debt with the aim to help this group pay off their balances more quickly and save them money by reducing the cost of their borrowing. During the pandemic, the “breathing space” moratorium was introduced to further support customers in financial stress. However, in the next few months as the cost-of-living crisis continues, the number of customers missing credit card payments will increase but these regulations will help to control numbers and as unemployment rises, spend and the ability to pay more off outstanding balances is expected to drop back down to levels more consistent with what was seen prior to the pandemic.
Liz Ruddick is Principal Consultant, Credit Life Cycle Practice, FICO