News & Views - Savantor

Reduction in credit card spend

Friday, 29 June 2012
According to the Bank of England, credit card lending in April recorded its biggest monthly contraction since August 2006.  Repayments outstripped new borrowing by £118 million, although lending through loans and overdrafts grew.  So if cardholders' balances are shrinking, what are the possible reasons behind this decline?
One reason may be people spending less on their credit cards because lenders have tightened up their credit allowances on existing cards and have not issued new cards to people with poor credit ratings. And that could make it more difficult for consumers to get the credit they need for homes, cars and other purchases.
A 2011 report by Standard Life found that credit card holders spend an average of nearly £4,000 a year on plastic, while savers manage to put less than half this amount away. Over 40 years, credit card holders will spend £152,160 on their debts, while those making monthly savings will put away £67,200.   In other words, card debt tends to outstrip saving and, while consumers may be making some progress on their balances, they aren't doing much to create a safety cushion of savings.
Falling card balances are nothing to celebrate if the economy simply has consumers too scared to spend. Lloyds TSB's May 2012 Spending Power report found that, on average, consumers had almost £100 less to spend on non-essential items in the month of April, and that income growth was at its weakest level since February 2011. If consumers are simply spending less on their cards because they don't trust the economy to get better, falling card balances are a symptom of greater problems, rather than a recovery.
The fall in credit card balances could simply indicate that people have switched from credit cards to debit cards in order to keep track of their spending.
Whatever the reason it is clear that UK consumers have been getting better at paying credit card bills on time. Payments that were a month overdue, as well as payments that were more than a month overdue, fell during the first quarter of 2012. If that behaviour continues, many UK consumers could emerge from the recession with a better credit standing and more borrowing power.
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