Banks Get Wiser On Credit Card Lending

From a wider economic perspective, any kind of increase in consumer spending is only a good thing. The more the average consumer spends, the better the British economy performs in general. Nevertheless, when consumer spending is leading an incalculable number of people into dangerous levels of debt, this isn’t quite the same beneficial situation.

Unfortunately, it seems that this is exactly what’s been happening over the past year. According to official figures from the Bank of England, borrowing growth across the UK hit enormous highs of more than 10% over the past 12 months, which is the kind of pace that hasn’t been recorded since long before the economic crisis set in. There’s been something of a binge on credit card borrowing, but the banks have decided that the time has come to slow things down a little.

A warning issued by the Bank of England stated that should there be an economic downturn, banks could face a bigger threat from consumer debt than from mortgage lending. The economic uncertainty surrounding the Brexit vote led to a sharp decline in spending, which many banks responded to with some of the most attractive credit card deals of recent years. Nevertheless, the rate at which applications have been pouring in and approved went above and beyond the expectations of most, which is why around a third of all lenders are now planning to become significantly more restrictive in terms of credit card lending criteria.

Experts have welcomed the decision, suggesting that for things to continue without tighter restrictions being imposed could prove detrimental for both borrowers and lenders alike.

“The Bank of England will be pleased to see lenders tightened credit scoring criteria for unsecured lending in the first quarter and expect to tighten them significantly further in the second quarter (particularly for credit cards),” said Howard Archer, chief UK and European economist at IHS Markit.

“If the fundamentals for consumers do weaken further as expected over the coming months, it is vital that banks adopt tight lending standards in granting unsecured consumer credit, or it risks causing serious debt problems for the economy. This would be reinforced if the Bank of England felt compelled to raise interest rates due to mounting concern over the potential inflation overshoot.”

As both the immediate and long-term effects of Britain’s exit from the European Union remain almost entirely unknown, borrowers at all ends of the spectrum are being advised to proceed with enhanced care and attention. While both interest rates and unemployment remain comparatively low for the time being, it is impossible to accurately predict how things may look just one or two years from now. Getting into unnecessary debt is therefore a mistake to avoid, as is selecting financial services and products without first seeking independent financial advice.

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