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MP65018

MAPS CONSUMER CREDIT AND DEBT 1998

Overview

Table of Contents

Executive Summary

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EXECUTIVE SUMMARY

PLAYERS & CHANNEL TO MARKET

Building society conversions are expanding the number of banks. There are many new entrants, particularly to the credit card sector. Credit cards can be obtained from such diverse sources as the Automobile Association (AA), the Lakeside Shopping Centre and The Sun newspaper. Recent years have also seen a number of American institutions entering the market in a move likely to continue to force interest rates down.

New distribution channels are also increasing the ease of access to banking, debt and credit services. As more suppliers have chosen to enter the market, so the circumventing of the traditional high street branch has continued - this is highlighted by a consistent reduction in branch networks by the banks and building societies. Direct mechanisms and technological alternatives, are making their mark on the sector.

As institutions move from focusing attention on the individual transaction to the entire relationship with a customer, so the power of the consumer becomes ever greater. Shifts in consumer attitudes and behaviour are therefore crucial to further developments in the credit industry.

In part due to this increasingly competitive arena, and in part due to the new emphasis on relationship building, financial institutions are now offering people substantial incentives to move their mortgage accounts and credit cards, so that consumers choose their alternatives instead of competitors.

Thus, market conditions become ever more explosive. As a result, loyalty to specific suppliers is becoming less stable and there is a dwindling in the supply of reliable long term customers.

CONSUMER DEBT

1995 data indicated a revival in consumer confidence with net lending rising to £7.6bn - a figure in excess of anything recorded in the credit boom of the late 1980s. With the burden of negative equity in the housing market easing, the immediate prospects for the debt industry look brighter.

Total lending to individuals in April 1998 grew by £3.2bn, a rise of 0.6 percent, year on year. The amount of secured lending outstanding in April 1998 grew by £2.3bn, a rise of 0.5 percent, and £0.5bn higher than in March.

CONSUMER CREDIT

The total amount of consumer credit outstanding stood at £455bn at the end of 1995, a rise of 5 percent on 1994s figure and 21 percent higher than the 1991 figure. By April 1998, credit was 16.2 percent up on the previous year.

Seasonally adjusted data from the Bank of England reveals a continuous growth in consumer credit.

The total rise from 1994 to 1997 was £41,398m (55 percent).

CONSUMER RESPONSE

Exclusive consumer research carried out for Market Assessment by the National Opinion Poll (NOP Solutions) highlights the following issues.

With regard to how UK consumers use finances to make purchases, almost a quarter (23 percent) agreed that they typically purchased items on credit or through loans, while just over a quarter (27 percent) preferred to put down a deposit and then use loans or credit cards to pay for the rest of the purchase. Notably, however, 70 percent of those interviewed said that they tended to save enough money in order to fund any purchase themselves rather than use any form of credit or loan.

Nearly half (44 percent) of those interviewed stated that they usually clear their credit card debt at the end of each month while over a quarter (27 percent) said that they are usually in debt at the end of the month. Over two thirds (69 percent) felt that the interest paid on goods using store cards is too high and almost as many (68 percent) felt that the interest on loan repayments is very high.

In terms of how UK consumers feel about loans and credit, 63 percent felt that it is embarrassing, being in debt and the same number of people worried about how easy it is to go over a credit card limit. Over three quarters of those interviewed (79 percent) believe that loans and credit are far too easy to obtain and two thirds (66 percent) state that credit and loan companies never tell the consumer what they could possibly be getting into.

With regard to how UK consumers react to accessing loan and credit services, over half (55 percent) believed that it is easier to get credit or a loan using technology rather than dealing with people and two thirds (67 percent) believe that the credit and loan services available over the telephone are very convenient. A third (33 percent) felt that it would be useful if applications for credit or loans could be made at the cashpoint and almost a quarter (22 percent) would like to see credit and loan services available through the Internet. 40 percent felt that they were never provided with a reason by the store if they were refused credit or a loan.

The research also indicated that women buy less on credit, are more worried how easy it is to go over the card limit and find it more embarrassing than men being in debt. These findings obviously have implications for suppliers in the way they market their products to each of the sexes.

In terms of age, the 25-34 years category were highest in their agreement that they typically buy items on credit or through loans (24 percent). There is almost no difference in the response of the social classes in terms of typically using loans and credit. Perhaps not surprisingly, those who most use credit and loans typically to make a purchase reside in London (21 percent) and the West Midlands (16 percent), the Capital of the country and the next major city.

Those who are in full time employment make heavy use of using credit or loans to typically pay for purchases (56 percent) and those who are not employed at all (33 percent). Equally, those who are homeowners typically buy items on credit or through loans much more so that other tenure categories (78 percent).

THE FUTURE FOR DEBT & CREDIT

The largest consumer individual debt will obviously continue to be as a result of the property market. The housing market has passed its low point in terms of pricing and the market expects at least to plateau if not slightly increase over the next few years, into the millennium. As such, with rising populations, more people working than ever before, and the advent of homeowners with two or more UK properties, UK consumer debt to mortgages will continue to increase.

Given the small yet perceptible developments in the mortgage market, other personal finance sectors are likely to follow suit.

In the 1980s, loans were prevalent for almost any activity. This was followed by the early 1990s caution, when only truly necessary loans were taken out. In the next few years, there will be a small increase in uptake in the personal loan market once more. Activities which are perceived of as fundamental, such as home improvement (as backed up by the increase in re-mortgages), will continue to appear as reasoning for funding requirements, but more luxury items such as holidays may start to prevail once more.

The credit dependent consumer of the late 1980s is unlikely to reappear and no financial institution will benefit so well again as competition continues to emerge from many different directions, such as suppliers of fast moving consumer goods (fmcg). However, there is increased consumer acceptance of plastic payments for everyday items. Thus, growth in the use of charge cards, credit cards and store cards as a means of ‘informally’ accessing cash will be the main drivers in this sector.

While this Report does not analyse the debit card market, it should be noted, that debit card usage is greatly on the increase. This means of accessing cash will have a great impact on the credit market in future years.

CREDIT RATING

UK consumers receive a credit rating, based on their propensity to pay their bills in a prompt manner (if at all). Credit scoring offers an indication of the chances of timely repayment. This is formally documented in a credit report, to which financial services providers have limited access, in order to establish whether a consumer is likely to repay a debt or credit being requested at any given time.

Accurate negative information is generally reported for seven years, within the rating. However, it should be noted that bankruptcy information is actually reported for as long as ten years.

Over seven million consumers in the UK cannot get credit. There are a number of credit repair agencies who promise to ‘clean up’ a consumer’s credit report, for a fee. These must operate within the terms of the Consumer Credit Act. They share the status of user accounts on a confidential basis. Credit assessment procedures statistically measure the probability of outstanding credit being repaired.

Alternatively, consumers can try to repair their credit rating themselves. Consumers are entitled to receive a free copy of their credit report, if they have been denied credit in the previous thirty days. The law allows consumers to investigate information within the credit file which is being disputed, for no charge. There are two main providers of credit information, Experian and Equifax. However, for most, the reality is more a simple question of waiting. Only time, a conscious effort on the part of the consumer and a personal debt repayment plan will truly improve a credit report, unless there is an inaccuracy.

Text © 1998 MAPS

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Last updated by Duncan Nottage 6th February 1999