By Claire West

With levels of unsecured borrowing falling by over £500 per household in 2010 and the borrowing habits of UK consumers going through significant changes, 2011 looks set to be a difficult year for credit card and other consumer finance providers.

This is according to PwC’s annual report on the UK consumer credit industry: ‘Precious Plastic 2011’.

Richard Thompson, partner, PwC commented:

“January is traditionally the time of year when people reflect on their financial situation and our research shows that consumer confidence is still weak. In fact, some 40% of respondents still expect their pay to be reduced or frozen in the coming year. Consequently, households are seeking to reduce the amount that they borrow. These worries are driving consumers back to ‘jam jarring’, whereby they shun large loans and open ended credit cards in favour of smaller, shorter term borrowing for a particular purchase, in an effort to control their borrowing.[/b]

[i]“Therefore it is not surprising that we have seen average unsecured credit (i.e. credit cards and personal loans) fall by some £500 over the last year to around £8,000 per household — a trend we predict will continue over the next few years with a further fall of up to £300 in 2011.

“However, we believe that interest rates on borrowing could rise by 2% to 3% by 2015, meaning that on average, UK households would need to find an extra £1,800 a year for interest payments alone — a significant proportion of their disposable income.”[/b]

The rise of the ‘underbanked’

Those consumers that do wish to borrow are finding it increasingly difficult to obtain credit — supply will continue to be constrained and many of the mainstream lenders, seeking to reduce credit losses are focusing on only those with a stronger credit history. At the same time, it is likely that credit scores have deteriorated across the UK, meaning that an increasing number of consumers will find themselves unable to borrow from the mainstream lenders effectively forcing them into the ‘underbanked’ category

Richard Thompson, partner, PwC continued:

[i]‘There is strong evidence that the type of credit demanded by consumers is changing. Point of sale finance products, payday loans, home credit providers and pawnbrokers will all play their part in providing for these kinds of consumers, but the cost of credit needs simpler explanation for consumers. A great deal of progress has been made by lenders in improving the transparency of products, but consumers themselves need to ensure they understand what they are signing up for.”

Give me debit, not credit

The UK’s cooling passion for plastic continued as the number of credit cards in circulation fell by some 1.5 million compared to 2009, to the lowest levels since 2003.By contrast, in 2010, debit cards have continued to gain in popularity, overtaking cash for the first time.

Demand and supply have both played a part in the decline in the use of credit cards. Consumers are focused on paying off their debts and are planning to save more, while lenders remain selective in terms of who the lend to.

Our consumer credit confidence survey shows that, 41% of people want to put more money away compared to 35% at the end of 2009. Within these figures a startling number of young people indicated a willingness to save, with over 70% of 18-24 year olds intending to save more over the next 12 months — more than double the proportion of over 45s.

Further regulation of the consumer credit market is in prospect — and there is talk of potential interest rate caps. Whilst this may be of benefit to some consumers there is the potential that this could make the provision of credit to many uneconomical.

Household borrowing: A sustainable habit?

Total household borrowing in 2010 fell by £6 billion to £1.45 trillion. Within this amount, secured lending (mainly mortgages) actually grew slightly on last year to around £1.24 trillion, however, with the Bank of England stating that Q3 of 2010 saw a ‘marked decrease’ in mortgage lending by banks, we can expect this figure to decrease in 2011. The more significant change has come in the decline in unsecured credit, with outstanding balances down £13 billion on 2009 to £214 billion, a trend PwC believe is set to continue.