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Amongst a more general picture of economic health that emerged last week there was a piece of particularly good news for the UK credit market.

The Bank of England (BoE) Trends in Lending report has claimed that lenders overestimated the number of people who would default on unsecured credit such as credit cards and loans over the most recent period.

Lenders reported that default rates on unsecured credit fell in the last three months of 2009, contrary to their expectations of an increase. The increase had been expected because of the supposedly increasing rate of unemployment and the increasing financial pressures associated with the Christmas period.

The good news was tempered, however, since the amount lost through defaults rose during the same period. This means that although fewer people were defaulting on their debts, those who were defaulting owed greater amounts of money.

Consequently, the cost of interest on credit card borrowing rose.

The margin between the Bank rate and the interest rate on credit cards is much wider than a year ago owing to the heightened credit risk, but the difference remained relatively static on personal loans, the report said.

Lenders have been stricter in who they lend money to as a result of the economic downturn.
However, default numbers were lower than expected because they thought unemployment would be worse than it has proved to be.

The number of people out of work in the UK saw a surprise fall in the three months to November.

In addition, and showing that lessons have been learnt from the credit crunch, consumers have been keen to pay off their unsecured credit bills, and lenders told the Bank that they expected this trend to continue.

The combined good news from this is that people are not only defaulting on their debts in fewer numbers, but they are also making more of an effort to pay those debts down. This makes good sense and gives hope that, as a nation, we will move on from the credit crunch with more skill at sound financial management.

That people with larger loans are still defaulting is bad news, but not unexpected, since we know that the longer term consequences of the credit crunch are still being felt. Perhaps theirs is an example to us all about how not to proceed when economic prosperity returns.

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A battle is brewing between the government and the UK credit industry over new plans to regulate the market and curb the excessive practices of some lenders.

Currently, government proposals include stopping credit card firms changing interest rates on existing debts and ensuring the most expensive debts are paid off first.

But now a trade body, the UK Cards Association, has claimed that the changes would push more people into financial difficulty, which is a little difficult to believe.

There are 30 million UK credit card customers holding 66 million cards.

The industry said that 62% of all UK adults had at least one credit card, but borrowing on these cards had been in “gentle decline” since 2005.

Despite greater caution from lenders about who gets a card, the government is keen to outlaw certain practices that it regarded as unfair and has challenged the industry to clean up its act.

It invited responses to proposals, published in October, which included changing the order of priority for credit card repayments, so that the most expensive debts, such as cash advances, are paid off first. The proposals also included increasing the minimum amount that must be paid off each month to accelerate the overall rate of repayment, banning the practice of raising borrowers’ credit limits without their consent and restricting or banning increases in interest rates on debts already incurred.

The plans follow other limits on credit card practices brought in during 2009, aimed at bringing more transparency for customers.

But the latest proposals have brought a strident response from the industry, which claimed in a 230-page report that customers would not benefit from some of the planned changes.

“These options would reduce competition within the industry,” said Melanie Johnson, a former Labour MP who chairs the UK Cards Association.

“They would also have far-reaching consequences for customers and lenders alike and would change the basic ‘deal’ offered by lenders to their customers and lead to increased financial difficulties for many and to more defaults.”

Instead, the association has put forward its own package which it says will protect vulnerable customers and cost the industry £250m a year

It agrees that people paying off their credit cards should see the most expensive debt paid off first.

But this would not apply for the two million or so cards – 3.1% of the total number of cards – where the borrowers only make the minimum repayment each month for a year. Here, the lender will decide which debt is paid off.

Just over half of these people pay the minimum amount because that is all they can afford, according to the association, with others choosing to pay a small amount because they are on a promotional rate and paying off debts elsewhere.
For that reason, the association said that minimum payments should not be increased. Instead, it said lenders should contact borrowers if the minimum payment had been made for more than six months in a row.

But all of this has not been universally accepted, with the Nationwide building society saying that card providers should always allocate payments to the most expensive debts first.

Also, the credit association said that changes to the interest rates of existing debt should still be allowed.

It argued that in 40% of cases, the interest rate was lowered, and the practice allowed card providers to be flexible. It said customers can opt out of any interest rate changes.

Finally, it said that only 8% of customers were offered an unsolicited increase in their credit limit in 2009. The association said that customers had 30 days to turn down such an offer, so the practice should not be banned except for those facing financial difficulties.

The ban on increases should come in for those who have only made minimum repayments for six consecutive months, it said.

Separately, insolvency experts have called for the rules to be tightened up over who can sell store cards – also covered in the government review. Trade body R3 said financially unqualified shop staff should be banned from selling store credit cards.

“It is frankly irresponsible to sell credit over the shop counter as though it is no more important than buying a sandwich,” said R3 President Peter Sargent.

Without proper training, shop assistants are inappropriately qualified to understand the consequences of what they are selling and often commission-driven. While these cards are presented as innocuous, they can lure vulnerable people into debt.

All the responses to the government’s proposals will now be considered by the Department for Business.

However, with a general election looming, any changes that require new legislation could take some time to be implemented and a new government might also come up with different plans.

It is clear to most analysts that the easy availability of credit is a major problem for both the financial and social wellbeing of the country. This problem needs tackling seriously and immediately and with little concern for the profit margins of the companies providing easy credit to vulnerable people.

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