News & Views - Savantor

Increasing Personal Debt

Monday, 03 December 2007

The latest figures for UK personal debt show an increase to an average of £33,000 compared to £17,000 in 2000.  However, due to the global credit market concerns there are likely to be problems ahead.  Banks have redrawn their lending rules and are turning down an increasing number of applications for loans, credit cards and overdrafts. Some card issuers are refusing as much as 50% of new card applications.  The situation is likely to be worsened by the fact that 1.4 million people will come off cheap fixed rate mortgages in the next 12 month.  This in turn is likely to lead to an increase in bad debt losses suffered by credit card issuers and other financial institutions.

Total personal debt in the UK including mortgages has hit £1.3 trillion fuelled by easy credit, an increase of 9.5% on 2006.  Tougher credit rules are likely to result in a down turn on Christmas spending particularly on credit cards which are already suffering.  Credit card spending for December 2006 came to £11.4 billion compared to £11.5 billion for the same period in 2005. There was a decrease of 4 per cent in the volume of credit card transactions, down from 205 million transactions for December 2005 to 197 million transactions in 2006.

So where will customers turn in these conditions?  We already know that debit cards are the favoured means of spending to acquire greater control but what about those for whom this is not an option?  There are card providers who will consider those turned down by more traditional issuers but increasingly it seems there are other providers ready to step in.  A new study released by Javelin Research & Strategy predicts that more customers will turn to online person-to-person (P2P) social lending networks to pay off credit card debt, with the amount borrowed for this purpose expected to grow from $38 billion in 2007 to $159 billion by 2012.  The survey of 2200 consumers found that 58% are expected to carry a balance on at least one credit card in the next six months and 44% of these are likely to use a social lending service to pay it off.  Of those questioned, 36% would use a P2P loan to get a better interest rate, 33% to avoid using credit cards and 27% because they do not qualify for a loan from a bank.

Banks cannot afford to ignore the rise of these institutions and whilst a more conservative approach to granting loans and card applications is probably overdue they must also look to offer more creative solutions and improve internal processes to increase their ability to respond quickly to new initiatives.

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