Signs of credit stress

Data on UK credit cards suggests that curtailed spending has helped some consumers but there has been an increase in accounts missing two or more payments signals growing financial stress, according to the latest report from FICO (www.fico.com).

In its analysis of UK card trends for January 2021 which highlights a mixed – and perhaps confusing – picture of UK consumer finances.  Furlough and forbearance appear to be masking the true impact of the pandemic, which may well lull politicians and lenders into a false sense of security.

“It is normal to see increases in the percentage of accounts and balances missing payments in January as a result of Christmas spend, but this January the growth has not been as marked as we saw last year,” explains Stacey West, Principal Consultant for FICO® Advisors.  

“This is not surprising due to the continuing furlough payments and payment holidays.  Other contributing factors are that more card issuers are offering forbearance measures and a larger proportion of borrowers are able to support their debt due to nearly a year of more limited spending.  However, of more concern is the increase in the two missed payment rate, with average balances on accounts missing two payments 10.6% higher than a year ago.

“As the furlough scheme has been extended to the end of September, with employers starting to contribute as of July, lenders have six months to ensure that they have identified as many of their customers as possible that will be impacted by the withdrawal of the support.  This is crucial to be prepared for potentially increased volumes of people who need help with their debts.  Early identification and pre-emptive actions will help to reduce the stress of those impacted in the second half of this year.”

A final indicator in the FICO report of increased financial duress is the use of cash on credit cards.  The percentage of consumers using cash via their credit cards fell 4.6% in January and is 76.5% lower year-on-year.  However, cash as a percentage of total spend increased 20%, which is in contrast to the normal January trend and suggests that those still using cash are doing so with higher amounts.  Plans to increase the contactless limit from £45 to £100 later in 2021 may result in a further decline in cash usage.

These card performance figures are part of the data shared with subscribers of the FICO® Benchmark Reporting Service.  The data sample comes from client reports generated by the FICO® TRIAD® Customer Manager solution in use by some 80 percent of UK card issuers.