Is our love affair with credit cards coming to an end?

26th January 2011

The amount of borrowing on credit cards in the UK has reached its lowest level for six years. Total credit card borrowing by individuals in the UK currently stands at £97 billion. The number of credit cards in circulation has also reduced significantly and is now at its lowest level for seven years (with sixty million cards in circulation). These statistics are extremely relevant in terms of trust deeds, as credit cards are the primary drivers of unmanageable debt levels.

Accompanying this trend is a reduction in the reliance on credit cards and a reduction in overall household borrowing. Average debt levels for a UK household has fallen by £500 over the last twelve months, and a survey by PWC suggests this trend will continue in 2011 with another £200 average reduction.

One reason for these reductions is that the main banks have become far more reluctant to lend. The reduction in the number of credit cards in circulation is not surprising giving that the banks are much less inclined to issue them to anyone with a less than perfect credit record, or to anyone who already has significant other debts. This explanation suggests we have less debt and fewer credit cards, simply because the banks will not let us.

It also seems the British public are feeling the need to repay debt in a bid to protect themselves from the current economic difficulties and risks. The retail price index, a measure of inflation which includes housing costs, is currently running at 4.7%. Such a figure is significantly above the pay increases being awarded to most employees, which is resulting in a decline in disposable income. Feeling the pinch already, many consumers are making significant cutbacks so that they can repay some of their debts before the situation worsens.

The UK public are becoming more aware of the extremely poor value offered by many credit cards, which has contributed to their reluctance to use them. Interest rates have been held at historically low levels for the past couple of years, however credit card rates have increased on average from 14.75% to 16.68% according to Bank of England statistics. Effectively the credit card lenders have significantly increased their profit margin as they’re borrowing the money for less, whilst charging their clients more.

As credit cards diminish in availability and popularity, it would be easy to assume that the number of trust deed cases will follow a similar statistical path. In reality however, a couple of other trends would suggest this may not be the case. The reluctance of the major lenders to issue cards and other types of unsecured credit has fuelled a boom in the delivery of high-cost credit, which includes payday loans and pawnbrokers. This type of lending appears even more likely than credit cards to create affordability issues for borrowers and the trust deed companies who are experiencing a huge rise in the amount of this type of lending amongst new clients.

Another factor to take into consideration is that while average UK household debt is £8000 and falling, a very high proportion of households have no unsecured debt whatsoever. Of those households with some level unsecured debt, the average figure will be much higher, all at a time where average disposable income levels are declining. This widespread squeeze on disposable income appears likely to force more people towards a trust deed, and in so doing will fill the gap created by the reduction in irresponsible bank lending.

If you’re considering a trust deed , read the collection of articles on this forum and learn from the experiences of others.

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