Defaulting on credit no longer
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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.
