News & Views - Savantor

Bad debt on the rise

Friday, 15 May 2009

On the basis that what happens in the USA today happens in the UK tomorrow it is not heartening to read about the increase in bad debt being seen by the major US credit card issuers. Credit card losses are soaring to unprecedented levels as unemployment rises, and cardholders struggle to make ends meet. From credit card write offs in the region of 5.5% in 2008, write-offs have shot up to 8.5% in Q1 of this year. Banks are doing their best to limit losses by tightening application approval criteria, cancelling unused card accounts, and reducing available credit limits. At the current rate, credit lines could be reduced by half compared to the available card credits only two years ago.

HSBC could see bad debt provision in consumer finance rise to more than £3.25bn for Q1 2009, up from just over £2bn for the same period in 2008 and most of this is to allow for card losses. Trading updates from Barclays, RBS and Lloyds all highlighted rising bad debt charges.

In September last year we commented on this emerging trend when spend on credit cards was the highest since March 2004 with a particular high in the food and drink spend. The number of cash disbursements on credit cards also rose sharply in August by 40%. Whilst this seemed like good news for credit card issuers it seems that it may have been an indication that cardholders were falling back on credit cards to buy more everyday items because households were feeling the pinch from the recession. If this is now more apparent in the UK market then Collections departments will see a dramatic increase in workloads as the year progresses.

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