Page last updated at 10:45 GMT, Monday, 9 November 2009

Bad credit card debts 'will soar'

Credit cards
The number of credit cards in circulation has actually fallen, PwC said

Bad credit card debts may reach as much as 9% of all outstanding balances by the end of next year, an accountancy firm has said.

"Bad debts in the sector have reached historic highs," according to PricewaterhouseCoopers (PwC). The figure stands at about 6% now.

This comes despite a "cooling passion" for credit cards, with borrowing down 3% to £64bn in the past year.

The number of credit cards in circulation has fallen by 8%, it said.

'Junk mail'

The past year had been a "tipping point" for the willingness of people to take on more unsecured debt, PwC said in the latest edition of its annual report Precious Plastic.

Total consumer debt including mortgages stayed the same at just under £1.5 trillion.

Within that, unsecured lending via credit cards, bank loans and hire purchase agreements was largely unchanged at £230bn.

But the stock of debt outstanding just on credit cards fell.

PwC pointed out that this new declining trend reflected not only consumer choice, but the decision of card companies to restrict new lending to customers who were more creditworthy.

"The recent announcement by one major issuer that they would not generally seek to acquire new credit card customers without those same customers also holding a current account with them is in stark contrast to the time when credit card issuers accounted for one in every four pieces of junk mail that made it through our letterboxes," PwC said.

Annual fees

Card companies wrote off £3.2bn because of bad debts last year.

More marginal customers will be expected to pay for even a standard credit card

PwC predicted that these losses would rise dramatically to levels never seen before in the UK as a result of rising unemployment, short-time working, and pay freezes and pay cuts.

The accountancy firm forecast that as bad debts rose, the borrowing rates on cards would also go up, and monthly or annual fees would become a standard feature as lenders sought to increase their revenue.

"At the higher end of the market customers will pay for access to premium benefits and at the lower end more marginal customers will be expected to pay for even a standard credit card," the firm said.

Paul Rodford of Card Payments, the UK cards association, said the easy availability of credit cards would disappear.

"Consumers are going to be faced with the unhappy prospect of a marked reduction in the availability of credit, a reduction in choice of products and an overall increase in charges with both increased interest rates and an expansion of annual and other fees," he said.

Unfair terms

All aspects of banking have been coming under intense regulatory scrutiny.

Last month, the government published proposals to ban some unfair terms in credit card agreements.

It wants to stop card companies putting up interest rates on existing debts and to stop them raising spending limits without agreement.

It also wants them to ensure that monthly repayments are used to pay off the most expensive debts first, and it wants to raise the size of minimum monthly repayments to speed up debt repayment.

PwC's report warned that while UK consumers were now borrowing less than before the financial crisis, debt levels in the UK remained high compared with the rest of Europe.

Each UK household has total average debt of about £60,000, made up of about £50,000 of secured debt and £10,000 of unsecured debt, PwC said.

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