Challenging times for consumer credit

When accountants PricewaterhouseCoopers published the `Precious Plastic 2010 - Consumer credit in the UK` report, it warned that `The future of credit cards is under threat as never before`.

It warned that people would face the prospect of reduced credit availability and reduced choice of products - at the same time as an increase in both the fees they face and the interest rates they`ll be paying.

Why? The report goes into some of the biggest changes going on in the credit markets today.

`Historically high levels of bad debt, a growing regulatory burden, funding and capital constraints and a tough macro economic environment are combining to place unprecedented pressure on UK lenders.`

Here`s a quick look at just two of these factors: bad debt and the `regulatory burden` which credit card companies are facing.

Bad debts

There`s been a huge increase in `bad debts` - the debts which the credit card companies end up writing off as the borrowers can`t afford to repay them.

In 2007 and 2008, around 6% of overall outstanding credit card debt had to be written off, according to the chart entitled `Credit card write-offs as a proportion of outstanding balances`. It`s an alarming figure - as the chart shows, the companies wrote off just 1-2% of outstanding balances in every year from 1994 to 1999.

Looking ahead, though, it`s expected to get much worse. In 2009, the report predicts they`ll have to write off 7% of the outstanding debt - and in 2010, that figure is expected to reach 9%.

`The potential increase in write-offs is dramatic,` the report states, `and levels of write-off of this magnitude have never been experienced by the UK industry before.`

`Regulatory burden`

As the report says, `Scrutiny and regulation of the consumer credit industry has continued to increase through 2009 and shows no signs of slowing`.

The industry is trying to cope with three major regulatory changes in just four years: the Consumer Credit Act 2006, the Payment Services Regulations 2009 and the Consumer Credit Directive (CCD) for 2010.

Legislation might aim to protect consumers - and it might do that very successfully - but PwC warns that the extra pressure on credit card companies could end up reducing the average consumer`s choice at the same time as it increases the cost they`ll end up paying.

Tags: debt, consumer credit, credit, bad debt

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