Year-on-year analysis reveals impact of
continued high costs and inflation requiring lenders to remain
vigilant
The last year has been challenging for UK households balancing
budgets against rising fuel costs, spiralling inflation and wage
pressures. Analysis by global analytics software firm FICO of its
proprietary UK credit cards data for March 2023 to March 2024
illustrates the impact these pressures have had on credit card
usage and debt management.
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FICO data on UK credit cards shows that
the percentage of payments being made compared to overall balances
has been trending down since July 2023. (Graphic: FICO)
Overall, consumer spend was up and payments to balance down
year-on-year with credit card balances remaining high, having
returned to pre-pandemic levels. The 12-month period also saw
greater use of credit cards to withdraw cash.
Highlights
- Month-on-month fluctuations in credit card spend followed
seasonal trends in 2023, however spending was higher than previous
years in every month
- December 2023 saw average spend per UK credit card reach £850 -
the highest since FICO records began in 2006
- The percentage of payments being made compared to the overall
balance has been trending down since July 2023 (apart from the
expected seasonal increase in January), and currently stands at
36.4%
- Balances are now back to levels seen pre-COVID, after dropping
during the pandemic; December 2023 saw a record high of £1,780
- In nearly every month, the proportion of customers missing
payments increased year-on-year and established credit card holders
(1-5 years) are the most likely to miss payments
- The number of customers using credit cards to withdraw cash
rose year-on-year but remains lower than pre-pandemic levels
FICO Guidance
With customers paying down less of their balances, more
customers will fall into the persistent debt category (over a
period of 18 months, a customer pays more in interest, fees and
charges than they have repaid of the principal). In a Consumer Duty
world, FICO recommends that firms are actively identifying these
customers at an early stage and reviewing their communications, to
encourage higher payments in support of achieving better value from
their credit card. This review should be comprehensive and include
payment and communications channels which best engage and empower
the customer to manage their finances proactively reaching out to
customers before they move into each of the persistent debt stages
will help to ensure they are on the right product based on their
current affordability needs.
With more customers missing payments compared to this time last
year, FICO also recommends implementing pre-delinquent strategies
and reviewing those already in production to try and reduce the
number and amount of balances moving forwards into delinquency.
These strategies will support firms in both their attempts to avoid
foreseeable customer harm and also carrying potentially avoidable
loss provisions, under IFRS 9.
Data and Analysis
Spending has remained high as payments to balance has trended
down
Continued high inflation and higher prices for goods has kept
spending high throughout the past 12 months. Seasonal fluctuations
have continued as expected, and the level of spending has remained
steadfastly higher than 2022-23.
The percentage of payments being made compared to overall
balances has been trending down since July 2023 – except for the
expected seasonal increase in January 2024. With lockdown and
increased savings this reached a high of 42% in May 2022, however
it has now fallen to 36.4%. With higher spending and lower
repayments, it follows that overall card balances have remained
higher than the previous year. Having fallen during the pandemic,
balances have now returned to pre-pandemic levels, reaching a
record high of £1,780 in December 2023.
FICO advises:
As spending and balances increase and remain high, risk teams
should review the number and amount of credit card limits being
offered to ensure they increase in line with these higher balances.
Customers going over their credit card limit should also be
reviewed for potential limit increase offers.
Missed payments for New, Established and Veteran card
holders
The number of customers missing one, two or three payments has
been erratic month-on-month throughout 2023-24. And when comparing
year-on-year, the proportion of customers missing payments
increased almost every month.
The last 12 months has also seen a change in the behaviour of
different segments of cardholders most likely to miss payments.
Before the pandemic, the number of customers missing either one,
two or three payments was always higher for the New segment, those
who have held the card for less than 12 months. This was expected,
as this group of customers had recently taken out cards so were
more credit hungry and likely to miss payments. This group also
contains first-party fraudsters with no intention of repaying
balances.
However, post-pandemic, it is the Established group of customers
(those who have held the card for between one and five years) who
are now more likely to miss payments. Reasons for this include:
- They would have taken out cards during the pandemic, when their
affordability may have looked better than usual due to lack of
spending opportunities and increased savings.
- Over the last 12 months, many of these customers would have
come to the end of promotional balance transfer offers at a time
when interest rates are higher than they were previously.
- The range of balance transfer offers has also declined, meaning
they may now be having to pay back these balances at a higher rate
than expected.
For the Veteran segment, customers who have held their card for
more than five years, the increase in missed payments is even more
apparent. One, two and three missed payment balances have all
increased at a higher rate since December 2023. There were also
increases in two missed payment balances between March and August
2023, and again between June and October 2023.
FICO advises: To meet Consumer Duty requirements to
proactively reach out before customers become overindebted and
affordability issues worsen, risk teams should focus on supporting
Established customers who are not managing to pay down their
balances. More specialised collections treatment may be
appropriate, perhaps moving customers onto a different card that
more suits their changing risk profile or reviewing their credit
card limit. Supporting customers through challenging times now will
boost loyalty and keep them as a long-term customer.
Risk teams should focus on supporting Established customers who
are not managing to pay down non-promotional balances, and take
proactive action before promotional APRs expire — perhaps move them
onto a lower rate, which is also a good incentive to try and keep
customers loyal to their bank.
Cash withdrawals on credit cards
In August 2023, UK Finance reported that consumers paying for
items in cash had risen for the first time in a decade. This
increase in cash usage was also reflected in FICO’s benchmarking
figures, which saw a steady increase in the percentage of customers
using their credit cards to take out cash between March and
September 2023. However, this was still significantly lower than
pre-pandemic, when an average 6% of customers used credit cards to
take out cash compared to 3.7% in September 2023. The trend for
more retailers and hospitality businesses to only accept card
payments is likely to be a factor in this shift.
Since September 2023, cash withdrawals have dropped back,
following a similar trend as witnessed in the previous year which
saw a decrease between September 2022 and February 2023 before
increasing over the spring and summer months. However, it is worth
noting that when comparing 2023-24 to 2022-23, every month has seen
more customers using their cards to take out cash than the same
month the previous year.
FICO advises:
Analytical teams should review risk models on an annual basis to
ensure they still rank-order risk effectively, especially when
models segment customers by cash usage. Risk teams should also
consider risk-based cash limit strategies, as well as monitoring
the number of cash transactions being accepted, even for underlimit
customers.
These card performance figures are part of the data shared with
subscribers of the FICO® Benchmark Reporting Service. The data
sample comes from client reports generated by the FICO® TRIAD®
Customer Manager solution in use by some 80% of UK card
issuers. For more information on these trends, contact FICO.
About FICO
FICO (NYSE: 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 100 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 other countries, improving risk management, credit access and
transparency. Learn more at www.fico.com.
FICO and TRIAD are registered trademarks of Fair Isaac
Corporation in the U.S. and other countries.
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For further comment on the FICO UK Credit Card activity
contact: FICO UK PR Team Wendy Harrison/Parm Heer
ficoteam@harrisonsadler.com 0208 977 9132
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