Brexit, saturated debt, signs of inflation. All topics come to mind this eighteen of April in 2019, as the Bank of England issues a gloomy Credit Conditions Survey for Q1 2019.
- Default rates increased significantly for total unsecured lending in Q1. This was driven by a significant increase in default rates on credit card loans (Chart 6). Lenders expected default rates for total unsecured lending to decrease slightly in Q2.
The Guardian reports on surging default rates in the UK.
- Credit card lenders reported that defaults jumped to their highest level since the first half of 2017, following a deteriorating trend that dates back to last summer.
- The default rate, which is calculated by the central bank based on a balance of responses from lenders, increased to 22.9% in the first quarter from 12.7% in the last quarter of 2018 and -11.2% in the third quarter of the same year. A positive figure indicates that the number of defaults has increased.
- The last time the credit card default rate rose above 20% was in the second quarter of 2017, when it hit 25.4%.
- “A surge in defaults on credit card borrowing shows that rising wages in the UK mask the financial stress that is still a reality for many,” The Bank of England reports
Irish Times projects a tightening of consumer credit, which is a no-brainer, as Great Britain contains the risk and reacts to the unintended consequences of Brexit.
- The Bank of England said on Thursday that banks reported they cut back on the availability of consumer credit in early 2019 and expected more tightening in the second quarter.
According to Yahoo Finance, Brits need to keep an eye on credit availability, which can set off a larger problem.
- Households may find it tougher to take on new borrowing the coming months – as a Bank of England survey of lenders has found the availability of non-mortgage credit is expected to decrease.
- The availability of non-mortgage credit to households was reported to have decreased in the first three months of 2019 and was expected to fall further in the second quarter of this year, the Bank’s Credit Conditions Survey found.
- Lenders said they had tightened their credit scoring criteria for loan applications slightly, with the proportion of loans being approved also edging down.
When you start disrupting the credit card model, economies that rely on consumer spending become vulnerable to weakened metrics, reduced spending, and delinquency that can impact consumer credit files for up to a decade. Think back to the U.S. in 2005-2006. Revolving debt peaked at $1 trillion, the plummeted down the mid-800 billion range. With that, came two painful economic years. It took a good 10 years for the U.S. credit card industry to fully recover. And now, like the UK, there are signs of stress brewing in the U.S.
In an ode to Wadsworth, we ramble:
Listen my children and you will hear
Of a brewing credit crisis that may be near.
On the eighteen of April in 2019,
Numbers are eroding and we know what that means.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group