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Shrinking credit card debts not due to borrower repayments

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Mr Money

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PostSubject: Shrinking credit card debts not due to borrower repayments Tue Jun 05, 2012 10:22 am

Figures released by the Bank of England last week indicated that credit card lending has contracted by the biggest monthly amount since 2006.

It would appear that borrowers are finally paying down some of what is owed on plastic but the figures also appear to show a switch to more borrowing on loans.

The figures however do not allow for how much of the fall in card borrowing is down to banks merely writing off their bad debts. Alternative Bank of England data indicates an average £6million is being written off every day this year.

The figures released by the Bank of England also showed the amount owed on credit cards dropped by £118million in April, the biggest fall since August 2006, when it fell by £152million.

The total still owed on credit cards has nudged lower by £600million lower this year from £55.6billion to £54.99bn. The level of bad debt written off on credit cards was £568million.

The fast growth of what are becoming known as 'bankruptcy light' options, such as Individual Voluntary Arrangements (IVA) and Debt Relief Orders (DROs), has made it easier for borrowers to walk away from relatively small amounts of debt.

It has been previously estimated by the campaign group Save Our Savers (SOS) that between 2008 and the end of last year, an 'extraordinary' £13billion of credit card debts was written off. It concluded that despite the widely held belief that debts were being paid down, borrowing on plastic had continued to 'run rampant' rising from £53.3billion to £56.5billion over that time.

The Office of Budget Responsibility expects the figure for total consumer debts in the UK to race ahead from nearly £1.5trillion to £2.12trillion by 2015 despite it being one of the worst levels of borrowing in the world.

However as banks tighten the purse strings borrowers with the worst credit histories are likely to borrow money elsewhere and figures showing other types of lending, which includes personal loans and payday loans, rising by £400million would seem to back this theory up.

The increase was smaller than the £500million rise seen in March however, prompting some experts to suggest the appetite for borrowing was being stifled by Britain's worsened economic climate.

'It is very possible that increased worries over the outlook resulting from news that the economy is back in recession and from the situation in the eurozone is intensifying the desire to improve personal finances,' said Howard Archer, an economist at forecaster IHS Global Insight.

Perhaps that far from signalling a fresh determination to get to grips with sky-high debts it may be instead that desperate borrowers are being forced to turn to notorious payday lenders which offer loans over short periods but at crippling rates of interest.

A recent PricewaterhouseCoopers (PwC) report warned that credit card use could fall into permanent decline with the rise of digital technology and payday lenders changing how people access credit.

The report maintained that the innovation and convenience offered by high interest payday loan companies and other alternative lenders was encouraging a broader selection of consumers to choose their services over banks.

Melanie Bowler, an economist at Moody’s Analytics, said: 'Households are favouring paying down debt, rather than undertaking new borrowing. Demand for credit will remain contained through 2012 amid lingering job security concerns.

'Interestingly however, there has been something of a boom over the past year in demand for relatively new payday loans, which offer short-term loans designed to be repaid typically within a month-and-a-half.

'With these bridging loans offering exorbitant repayment rates, the risk of UK households actually falling deeper into debt is increasing.'

Some borrowers have been forced into the arms of payday lenders, which commonly charge interest of between 1,500 per cent up to 4,000 per cent, because banks, rocked by the financial crisis, have tightened up their lending rules.

The Bank of England figures also provided further evidence that people are having a tougher time taking out a mortgage, as approvals remained way below their long-term average.

There were 51,823 approvals for house purchase in April worth £7.6billion, a 1.5 per cent increase on the previous month, but still under the previous six-month average of more than 53,000 approvals.

The figures have been modestly creeping up after hitting a seven-month low in February, just before a two-year stamp duty holiday for first-time buyers ended the following month.

The Bank of England expects lenders to tighten their credit criteria further in the coming months amid the weak economy and the eurozone crisis, making it harder for people to meet the requirements to take out a mortgage.
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