Rising unemployment, insolvencies and
strain on household finances have led to an increase in the level
of credit card-related bad debts and delinquencies in
card-saturated markets worldwide, with industry practices under
intense scrutiny. But the scale of the problem is disputed by
competing interests, as Victoria


Forewarned is forearmed, as the
saying goes and nowhere is this more relevant than in the credit
card industry, where eye-watering levels of bad debts and record
losses on credit card portfolios have forced issuers to overhaul
their risk management and lending activities.

Responsible lending is the catchphrase on all
issuers’ lips, as they seek to shake off the popular image of them
capitalising on consumers’ misfortune by ramping up interest rates
and fees, and reposition themselves as consumer-friendly

Issuers are also mindful of the increasing
scrutiny coming from industry regulators and governments, which in
the US has led to the introduction of swingeing laws (most notably
the CARD Act, which takes effect this month) which severely
restricts issuers’ ability to levy fees and charges.

Amid the financial turbulence of the past two
years, it has become apparent that rising consumer indebtedness was
directly caused by the ease of lending restrictions on unsecured
credit, which enabled consumers to gain access to credit lines that
far surpassed their ability to repay. And the consequences are all
too clear.

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By GlobalData

UK debt levels

The UK may have come out of
recession in the first quarter of 2009, but by no means does this
signal that the UK’s personal debt levels are not a cause for
concern. As the most saturated credit card market in Western
Europe, the UK’s debt levels stand far above those of markets in
continental Europe. According to the Bank of England, at the end of
December 2009, total UK personal debt stood at £1.46 trillion
($2.25 trillion) – a growth rate of 0.7 percent from 2008.

Total consumer credit lending to individuals
at the end of December 2009 was £226 billion, reflecting the
stagnation of the market, with the annual growth rate of consumer
credit remaining at -0.5 percent. Excluding mortgages, the average
household UK debt in December 2009 was £9,000 and the average owed
by every UK adult is £30,252 (including mortgages). This is 129
percent of average earnings.

Britain’s interest repayments on personal debt
were £66 billion in the last 12 months. The average interest paid
by each household on their total debt is approximately £2,620 each
year, much higher than in previous years.

According to the British Bankers Association
(BBA), as of December 2009 total credit card outstandings stood at
£63.9 billion, £0.4 billion higher than November but around £2.4
billion lower than a year earlier. The proportion of balances
bearing interest fell by 0.2 percent to 66.2 percent. There were
60.4 million cards in issue at the end of December, relating to
49.7 million accounts, 69.4 percent of which were active or had a
balance outstanding.

Such high indebtedness levels have caused a
surge in the number of people reporting financial difficulties, a
problem which has been exacerbated by the recent fall in UK house
prices which has affected consumers’ ability to refinance existing
debt by remortgaging. Add to this rising unemployment levels and
it’s clear to see that UK consumers are sharply exposed to
financial stress.

Further evidence of the financial strain on UK
consumers came from the Office of National Statistics’ Wealth and
Assets Survey, which showed that one in ten of all UK households
(2.5 million) were in arrears on at least one credit commitment in
the period between 2006 and 2008. This increased to 13 percent
among households with any borrowing commitments. The figure was
higher still among those with non-mortgage borrowing (17


UK credit card repayment
behaviours, 2003-2008








Full (%)







Partial (%)







Revolvers (%)







Minimum (%)







Notes: full payers always repay the fill
balance on all of their cards; partial payers occasionally do not
repay the full balance on at least one of their cards; revolvers
pay more than the minimum payment but less than the full payment on
at least one of their cards; minimum payers pay only the minimum
payment on at least one of their cards (this could include those
borrowing on an introductory 0% interest rate) Source: Consumer
Payments Survey 2003-2008

There was more bad news from global business
consultancy PricewaterhouseCoopers (PwC) in its 2010 Precious
Plastic report, which estimated that the average borrowing per
credit card has increased by 5 percent in 2009, surpassing £1,000
for the first time.

According to the report, the UK’s debt levels
stagnated over the past year to amount to £230 billion, in stark
contrast to 2008 when unsecured lending grew by 6 percent. PwC’s
report, widely acknowledged as a barometer of the UK lending
market, states that UK credit card borrowing fell by 3 percent in
2009 to £64 billion, while the number of credit cards in
circulation fell by 8 percent.

ConsumerAverage household debt stands at £60,000 per house made up
of £50,000 in secured debt and £10,000 in unsecured debt. The
average household will need to spend approximately 15 percent of
net income just to service interest payments arising from this

Also, there was a striking drop in new
lending, with unsecured and secured lending falling by 39 percent
and 79 percent respectively. According to PwC, this contraction is
being driven both from the supply side as lenders continue to
reduce the availability of credit, and from the demand side, with
consumers less willing to take on more debt.



Cautious outlook

However, with the UK now officially out of
recession and economic recovery gaining momentum, PwC believes
demand for consumer credit will begin to return. But lenders will
be unable – or unwilling – to increase supply sufficiently to match
demand, leaving consumers with rising costs of credit and
increasing difficulty in gaining access to it.

As an example, bad debt levels are continuing
on an upward trajectory. According to PwC, bad debts have reached
historic highs, with total credit card write-offs standing at 5.8
percent of outstanding balances in 2008. PwC estimates that
write-offs will continue to increase and could reach 9 percent of
outstanding balances by the end of 2010 – something that would
significantly hurt issuer profits at a time when they are already

And according to PwC’s Credit Confidence
survey, there is a continuing erosion regarding consumers’ ability
to handle personal debt. Only 32 percent of survey respondents
strongly agreed with the statement: “I am able to make repayments
on all the outstanding credit I have.” This compares with 56
percent in the previous year.

And a separate report by price comparison
website Moneysupermarket.com shows that two out of five credit
cardholders are using their credit cards to buy basic everyday
items such as food and fuel – which the industry considers a clear
sign of financial distress.

Further worrying signs come from UK personal
finance website Moneyfacts, which stated that interest rates on
credit cards have gone up by more than a quarter in four years,
with almost seven million cardholders seeing their rates increase
in 2009 alone. Moneyfacts added that the average rate of interest
has risen to 18.8 percent, the highest level since 1998.

However, UK industry body, the UK Cards
Association, refutes this by saying that “there is no direct
correlation between base rates and credit card APRs. Even when base
rates fall, the costs of fraud and bad debt and the cost of
operating an unsecured open-ended line of credit continue, so
standard credit card rates may not come down”.

It added that between January and October
2009, of the 66 million credit card accounts in the UK, 10.6
million accounts were repriced, with around 40 percent of these
having their interest rate lowered – and that 61 percent of
customers do not pay any interest at all as they pay in full every

Industry fights back

The UK Cards Association has taken a
leading role in debunking many misconceptions around credit card
industry practices and galvanising opposition to the implementation
of CARD Act-style legislation being implemented in the UK.

It is quick to argue that far from the
industry suffering under the collective weight of consumer anger,
by and large UK credit cardholders are generally satisfied with
industry practices.

In a paper published in January 2010 as a
response to the UK Department for Business Innovation and Skills
(BIS) consultation A Better Deal for Consumers: Review of the
Regulation of Credit & Store Cards, which was published in
October 2009, the association commissioned a series of UK credit
cardholder attitudes, stating that “there is a very high level of
consumer satisfaction, with 79 percent of those questioned
expressing satisfaction with their cards and 95 percent showing no
level of dissatisfaction.”

Furthermore, the association said that the
current practice relating to unsolicited credit limit increases
does not lead to increased debt, but customers in practice may use
them in the same way that they generally use credit, to bring
forward spending. And when it comes to repricing, the current
practice relating to risk-based repricing of debt leads to changes
in customer behaviour to reduce spending on credit cards, which
benefits both customers and credit card issuers.

Relating to minimum payments, the association
stated that the minimum payments regime is used rationally by
customers, and customers who make minimum payments pay off debt
over the long-term at the same speed as customers who do not make
minimum payments. The regime does not increase debt, although
changes to the regime may well do so.

Additionally, customers make significant use
of the balance transfer deals on offer, which are made possible
through the practice currently operated by most credit card issuers
on allocation of payments.

The association argues against the imposition
of further restrictions on the ability of credit card issuers to
offer “flexible and innovative” products, which would significantly
reduce the profitability of the industry. The association quotes
figures which suggest that the scale of the loss from the most
far-reaching options suggested by BIS could be as much as £2.5
billion per annum. Also, any changes imposed would likely restrict
favourable consumer offerings; raise interest rates generally; and
begin charging for credit card usage.


Policy proposals for UK credit

Policy Area

Industry proposals

Allocation of payments

  • Move to a high-to-low allocation for anything above the minimum
    payment (for example, where any payment above the minimum is
    allocated first to the card balance bearing the highest rate of
    interest and then to each successive balance bearing the next
    highest rate of interest) with the minimum payment allocated at the
    discretion of the card issuer

Unsolicited credit limit increases

  • Provide for a 30-day notice period ahead of a limit
  • Provide clarity on the multiple channels by which the customer
    can opt out
  • Provide clarity that the customer can opt out of an individual
    increase and/or permanently using an industry standard
  • Provide cardholders with a means to decrease their limit
    without a need for personal interaction – for example, online and
    automated telephone
  • Incorporate an exclusion relating to habitual minimum
  • Incorporate the three core exclusions as set out in the
    risk-based repricing principles
  • Commitment that customers will find it simple to decline the
    higher limit

Minimum payments

  • Contact habitual minimum payers (for example, those that are
    doing so with no obvious reason or benefiting from a promo rate)
    every 6 months to remind them of the implications
  • Commitment to work with BIS in reviewing the output from
    Warwick University

Simplicity and transparency

  • Industry is happy to consider further the merits of all three
    suggestions post consultation closing date
  • Annual statement
  • Stakeholder lending product (‘vanilla’) credit card
  • Standardised product labelling/benchmarking

Repricing of existing debt

  • Continuation of the existing Statement of Principles
  • Produce a generic leaflet/fact sheet entitled “Risk-based
    Pricing Explained”, covering both increases and decreases. Needs to
    cover what are ‘high risk’ indicators; factors that are NOT used;
    how to appeal etc. Delivery options must be flexible
  • A commitment to further promotion and explanation of the

Source: UK Cards Association