Higher inflation and interest rates increasing financial volatility

28th June 2023

Latest analysis of credit card data from FICO has painted a picture of considerable consumer financial volatility as the dual pressures of higher inflation and higher interest rates squeeze funds.

FICO says the ongoing inflationary challenges faced by consumers continue to be reflected in higher levels of credit card spend, compared to 2022 – with monthly spend up by 6.7 percent in March and 8.7 percent in April. This forms part of a long-term trend, evidenced by the fact that spend in April 22 was already 21% higher than the equivalent period in 2021. As a consequence of these increases in spend, the average active balance for both March and April 2023, is 8.2 percent higher than last year.

When comparing month-on-month movements in spend and arrears, the continuing juggling act being performed by many consumers becomes apparent. Data for March and April shows a continued see-saw in spend and repayment patterns. In March, spending was down 6.1 percent compared to February 2023; the percentage of accounts missing one payment was up 22.8 percent. In April there was a 17.9 percent drop in accounts with one missed payment, whilst the percentage of accounts having missed two payments reduced slightly. This suggests that many customers are juggling their finances, skipping payments one month and trying to make it up the next month.

The figures showed that ,onth-on-month, after falling by 15.6 percent in February, the percentage of accounts missing one payment jumped back up in March by 22.8 percent and then fell again in April by 17.9 percent

Accounts with two missed payments were relatively stable month-on-month in March and April. However, year-on-year they are still significantly higher – by 20.2 percent in March and 19 percent in April

Fico said that the yo-yo pattern of financial management — seen for the last few months — reflects the general economic uncertainty, particularly for mortgage holders. With increased scrutiny as the new Consumer Duty Guidance comes into force on 31st July, lenders will be wanting to apply the highest levels of account management.

Areas of particular concern will be the pattern of increased spend but reduced percentage of payments to balance. The average credit card balance has generally been trending upwards since the pandemic slump, and is now back at levels seen pre-COVID.

How consumers are managing their existing financial commitments — especially those who have found themselves, perhaps for the first time, with one missed payment will also be important to monitor. As the percentage of accounts with one missed payment yo-yoed from March to April, lenders will be looking for any signs of increased financial stress, for example if the percentage of those missing two payments increases.

Currently it seems that cardholders are making a concerted effort not to roll arrears forwards, with the percentage of two missed payments only increasing by 2.1 percent in March and actually decreasing by 0.3 percent in April. However, with such volatile conditions, lenders will want to remain focused on these trends in the next few months.

Key Trend Indicators – UK Cards March 2023

Metric Amount Month-on-Month Change Year-on-Year Change
Average UK Credit Card Spend £735 -6.1% +6.7%
Average Card Balance £1,645 -1.0% +8.2%
Percentage of Payments to Balance 37.99% +0.4% -4.1%
Accounts with One Missed Payment 1.75% +22.8% +6.1%
Accounts with Two Missed Payments 0.32% +2.1% +20.2%
Accounts with Three Missed Payments 0.20% -6.4% +28.4%
Average Credit Limit £5,550 0.0% +1.3%
Average Overlimit Spend £95 +4.4% -26.2%
Cash Sales / Total Sales 0.86% -0.5% -33.5%

Source: FICO