Reduction in credit card write-offs

2nd December 2010

The Bank of England has reported this week that the amount of credit card debt being written off by banks is reducing. In the third quarter of 2010 the amount fell to £740 million, which is the lowest figure since the first quarter of 2008. It also represents a huge drop in the record credit card write-offs in the second quarter of this year. Reports indicate that at some points banks were writing off sums equal to 10% of their total credit card lending.

Credit card debt is generally the largest constituent of debts that become subject to a protected trust deed.

When banks determine a client is unlikely to repay their debt they will often write-off some or all of the debt. This may just be an internal accounting exercise which does not necessarily signify they will no longer chase the client for payment. Another source of write-offs associated with credit cards occurs where a bank ‘sells’ credit card debt to a debt purchaser who will in-turn seek repayment from the account holder. Such sales are made at values much lower than the actual balances on the accounts.

Commentators are split in their analysis of the reason for the drop in these bad debts. Some contend that many people’s finances have improved and that further evidence of this can be seen in the reduced number of formal debt management procedures such as IVA’s, bankruptcies and trust deeds in existence. Other commentators believe that the fall in credit card bad debt reflects more restrictive lending by the banks in the first place.

The figures themselves provide some justification for the banks which have steadily increased the rates of interest they are charging on credit card accounts. This form of lending is clearly comparatively risky for them compared to other types of lending.

However, an irony exists whereby the increases in interest rates forced onto some borrowers may indeed have tipped them over the edge so they are no longer able to maintain their credit card payments. At this point debt solutions, such as protected trust deeds, may be required to manage what has become unaffordable debt on the part of the borrower.

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