Rise in default rates on credit cards and loans

The Bank of England’s latest credit conditions survey for the first quarter of 2024 has revealed a rise in default rates on credit cards and other loans, with overall demand for unsecured lending increased.

The data shows that demand for unsecured borrowing rose in early 2024 – driven by credit cards – and is expected to rise again in the second quarter. Mortgage demand also rose in the first three months of the year, and is expected to be higher again in the current quarter.

Lenders also saw default rates on secured loans to households, including mortgages, increase in the first quarter. While losses given default – the estimated amount a lender loses when a borrower defaults – fell in the first quarter, lenders expect it to rise in Quarter 2.

This data set does not record the actual number of defaults but reflects a survey among lenders, designed to give early sight of potential problems in credit markets.

The survey also found that default rates increased slightly for SMEs in the first quarter but were unchanged for larger firms. Lenders reported that the overall availability of credit to the corporate sector was unchanged in Quarter 1 and is expected to increase slightly in the second quarter.

Commenting on the figures, Sarah Coles, Head of Personal Finance at Hargreaves Lansdown said “Debt defaults keep mounting, and we’ve not yet reached the peak. It shows the desperate scramble that so many people face in keeping on top of their bills right now.

“Mortgage defaults and missed payments on credit cards and loans both rose at the start of this year – with unsecured debt arrears accelerating again. Both are expected to grow faster in the coming months too.

“Given that those on lower incomes don’t tend to have mortgages and may struggle to qualify for a credit card, it demonstrates that the cost-of-living crisis remains a problem for large numbers of middle-earners. Anyone who has overstretched themselves in the property market, or took on too many fixed costs in better times, has faced an impossible task as their incomes grew ever-tighter.

“Huge numbers of people have been borrowing their way through the crisis, and plenty of people will continue to do so. The fact that demand for unsecured borrowing is still rising is an indication of just how many people are relying on credit to make their household budgets stack up. However, there comes a time when borrowers run out of road, and as time goes on, more middle-earners will be hitting this brick wall.

“The one hope they have is that the cumulative effect of National Insurance cuts and falling energy bills will help ease some of the pressure. It remains to be seen whether this is enough to turn things around. At this stage it’s likely to be incredibly difficult to make even more spending cuts in order to prioritise debts, but borrowers may have no other choice if they’re going to get back on track. If you’ve cut every cost you can think of, it makes sense to get some help from a debt charity like StepChange.

“For those on lower incomes things are even tougher. The HL Savings & Resilience Barometer, showed that lower earners face serious debt problems. More than a quarter (27%) are in arrears, while 37% have debt worries. It’s easy to see why, because their debt repayments (excluding mortgages) average £168 a month. They won’t feature in these figures, but their budgets are even tighter and their ability to cover the bare essentials is being sorely tested.

“The positive in these figures is a pick-up in demand for mortgages, and an expectation that mortgage borrowing will keep rising through the spring. RICS figures show that buyers and sellers are gradually returning to the market. Optimism remains very fragile, and is relying on the Bank of England cutting rates in the coming months. However, if buyers get what they expect, we could see the market strengthen through the summer.”

Richard Lane, Chief Client Officer at StepChange Debt Charity, said “It was always a concern that the worst impact of high inflation could take a while to filter through to household finances, and worryingly that may now be the case. Some people’s finances may have bounced back from this crisis but for others, cost of living pressures are still persisting. Last year we saw debt across household bills increase by 10% among StepChange clients, while total unsecured debt reached its highest level for a decade. With the price of most essentials continuing to rise, many will resort to borrowing to afford them.

“We would urge lenders to be aware of how many of their customers may just be facing the ramifications of two years of high inflation now. The FCA yesterday reminded lenders of their duty to help borrowers in financial difficulty. As part of the Consumer Duty, it’s important that lenders have the mechanisms in place to identify that financial difficulty early, and offer tangible support and referrals to free debt advice for those who are struggling.”