Banks to avoid surge in delinquency even as average interest rate on credit card hits highest level this millennium
The average rate of interest on UK credit cards hit their highest level in nearly 30 years last month, but experts suggested there would not be a surge in delinquencies.
According to Bank of England data, the average rate of interest on a credit card surpassed 23 per cent in June for the first time since December 1995.
Andrew Fisher, chief growth officer at Freedom Finance, said “consumer credit rates are now once again on an upward trajectory with credit cards reaching their highest levels in nearly 30 years”.
Despite the rising costs, there is little evidence customers are cutting back. Data released today by UK Finance showed that outstanding balances on credit card accounts had grown by 9.5 per cent over the past year.
Laura Suter, head of personal finance at AJ Bell, said that in the cost of living crisis it was inevitable people would “put more on plastic”.
Across the UK, consumers hold more than £61bn in credit card debt at the end of April, up from £57bn last year and £1.2bn more than at the beginning of this year.
“With more people turning to credit cards and the cost to just keep up the minimum monthly payments increasing, it’s inevitable that more people will end up defaulting on their debt,” Suter continued.
However, while there is likely to be an uptick in delinquencies, lenders are unlikely to be threatened by any increase.
Markus Papenroth, head of EMEA consumer ABS at Fitch Ratings, argued there is “no neat correlation” between interest rates and charge-offs. He pointed out that the number of accounts incurring interest has fallen over the past few months as consumers choose to pay off monthly debt in full.
Richard Barnes, UK financial institutions analyst at S&P, suggested credit cards are less tied to changes in interest rates than mortgages, meaning the impact of rate hikes on credit card repayments is “proportionately smaller”.
This came through in the Bank of England’s stress test, where the scenario led to a five per cent jump in impairments in unsecured lending compared to 15 per cent increase for mortgages.
Any increase would also begin from very low existing levels. The most recent data from Barclays shows that card delinquencies remained at historic lows in the first quarter of this year.
Analysts at S&P also pointed out that UK consumer credit is generally held by richer consumers, with nearly 70 per cent of credit card debt held by the top four income deciles.