The latest analysis from global analytics software leader FICO reveals a concerning increase in the average active balance on UK credit cards. The new data shows that despite a typical seasonal reduction in spending, balances grew to £1,895, 5.1% higher year-on-year. Also, the percentage of the balance being paid off by customers fell year-on-year by 7.7%. This is symptomatic of the ongoing affordability challenges many UK consumers face, and represents a growing latent risk for lenders. Having an appropriate level of focus on limit strategies and the identification and treatment of customers in the early stages of financial difficulties is vital to help manage this risk and support good customer outcomes.
Following the peak in June, spending on credit cards fell to an average of £800 in July. While a drop in spending is typical at this time of year, the fact that it is 1.6% lower year-on-year could reflect overall pressure on consumer finances. Lenders will be concerned, however, that even though spending was lower during the month, the average active balance continued to trend up. Early identification and support for those customers who are in the earliest stage of financial difficulties, amongst those with an increasing balance, will help to mitigate risk and support profitability.
Another area of concern for lenders is missed payments. Year-on-year there has been a drop in the number of customers missing payments. However, the average missed payment balance continues to trend upwards. The percentage of customers missing one payment continues to be erratic. After June's 11.3% drop, July saw a 10.1% increase to 1.39%. Year-on-year, this equates to a 10% decrease. The number of customers missing one payment has been trending down over the last 12 months. The number of customers missing two payments has been steadier, standing at 0.3% in July, a 1% decrease month-on-month and a 5.1% decrease year-on-year. While average balances on these accounts were slightly down month-on-month by 0.4% to £2,875, this is 6.9% higher year-on-year. Average balances for customers with three missed payments rose by 3.1% month-on-month and 8.1% year-on-year to £3,300. With the average balance of customers with three missed payments increasing by 3.1% month-on-month and 8.1% year-on-year to £3,300, lenders will want to review collections prioritisation strategies to support those customers with higher outstanding balances. When comparing delinquent balance rates to the overall balance, this ratio is gradually increasing for customers missing one payment or two, with a more apparent trend upwards for those missing three payments. Risk teams can help to mitigate this by reviewing credit card limits to ensure that those accounts more at risk of missing payments are not offered limit increases.
An important warning indicator of potential financial stress, the percentage of customers using credit cards to take out cash continued to rise. Typical of the summer months, it increased 1% month-on-month to 3.21%. It is expected that cash usage on cards will continue to increase again in August and September before dropping back down during the autumn. The percentage of the balance being paid off by customers fell year-on-year by 7.7%. This is symptomatic of the ongoing affordability challenges many UK consumers face.
FICO powers decisions that help people and businesses around the world prosper. Founded in 1956, the company is a pioneer in the use of predictive analytics and data science to improve operational decisions. FICO holds more than 200 US and foreign patents on technologies that increase profitability, customer satisfaction and growth for businesses in financial services, insurance, telecommunications, health care, retail and many other industries. Using FICO solutions, businesses in more than 80 countries do everything from protecting 4 billion payment cards from fraud, to improving financial inclusion, to increasing supply chain resiliency. The FICO® Score, used by 90% of top US lenders, is the standard measure of consumer credit risk in the US and has been made available in over 40 other countries, improving risk management, credit access and transparency.
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