UK cardholders have more credit- but will they use it?

Recently, The Bank of England upgraded its growth forecast for the UK economy, now expecting Q3 growth to be 0.7%, up from the forecast of 0.5% last month. Britain's Organisation for Economic Cooperation and Development also predicted that economic growth would accelerate by a relatively brisk 1.7 percent between June and December this year. While this is pleasing news for all of us, will consumers have the credit they need to keep the momentum going throughout this economic pick-up, or will the "credit gap" stall their spending? – asks Daniel Melo

Recently, The Bank of England upgraded its growth forecast for the UK economy, now expecting Q3 growth to be 0.7%, up from the forecast of 0.5% last month. Britain’s Organisation for Economic Cooperation and Development also predicted that economic growth would accelerate by a relatively brisk 1.7 percent between June and December this year. While this is pleasing news for all of us, will consumers have the credit they need to keep the momentum going throughout this economic pick-up, or will the "credit gap" stall their spending? – asks Daniel Melo

Now, I’m not trying to bring doom and gloom to a positive story – the signs for both the UK economy and consumer credit look good. FICO’s latest quarterly snapshot of UK cards performance gave another encouraging signal, finding that average credit card limits are at their highest point in over two years. FICO Benchmark Reporting Service data, which compares overall market performance on some 26m UK cards with individual card issuers’ performance, revealed that the average credit limit for classic credit cards has risen by 3.9% over the year.

The increase was primarily driven by new accounts (under a year old) and established accounts (open between one and five years), which have both seen an increase of more than 6% in the last 12 months. Veteran accounts (those that have been open for more than five years) have experienced a more modest average increase of 1.4%.

Consumer card spending has also increased to its highest point in two years – up 7.6% year-on-year. This may well indicate that consumers’ confidence in their ability to repay card debt is strengthening. The latest data around delinquency patterns supports this view, as delinquency rates are also down. In particular, ‘one-cycle balances’ (where a customer misses a payment for one month) are at their lowest in more than two years, having dropped by more than 16% in the last 12 months.

The increase in consumer spending and reduction in delinquencies are a great opportunity for card issuers. They can explore offering higher credit lines now they see that these areas are becoming more stable, in order to increase individual customer value. Of course, raising people’s credit limits doesn’t necessarily mean they will use them, and we suggest that card issuers reassess how and when they offer more credit and keep abreast of the credit gap as the economy grows.

We believe there is scope for lenders to review their offer qualification criteria to ensure they are targeting not only low-risk, profitable customers, but those most likely to spend the extra credit that is made available to them. This will also help issuers mitigate the potential impact of unused exposure on their Basel Capital Reserves. How do you think this growth in consumer spending will affect the credit market?