Finance Matters

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Consumers are shunning credit cards in favour of debit cards, digital payment and payday loans, according to a new report from PricewaterhouseCoopers (PwC).

Although UK households paid off some unsecured debts in 2011, the average debt was around £7,900 at the end of the year.

The Ernst & Young Item Club has also reported a trend for consumers to shun banks and seek credit from alternative sources.

It claims that bank and building society lending to individuals has decreased by 23% since 2007 while lending by alternative lenders, including payday loan companies, has increased by 42% over the same period.

Speaking to the BBC, Neil Blake, senior economic adviser at the Item Club, said: “The contraction in consumer credit is driven by lack of demand to an extent, but we just need to look at the phenomenal rise in payday loans to see that the focus on decreasing demand masks a shift towards alternative providers.”

According to the PwC report, total outstanding credit card debt fell by 5% in 2011, with an average card balance of £1,000 at the end of the year.

In contrast, debit card usage continued its upward trend and increased 10% last year, making it the most used payment method over cash.

Simon Westcott, director of PwC, highlighted the use of digital payment methods, especially among younger people and suggested that credit card usage could continue to decline.

Mr Westcott commented: “This generation seems unlikely to switch to increased credit card usage in later life, as perhaps they would have done in the past, suggesting that debit cards, mobile payments and other innovations will force the credit card into an ever decreasing market.”

The use of payday loans, which offer a much easier application process than other forms of credit, is increasing at a ‘phenomenal’ rate according to the Item Club’s Mr Blake.

However, although payday loans can be affordable if they are paid off at the end of the term – usually around a month – rolling them over can lead to a spiral of debt because of their extremely high interest rates.

Consumer rights campaigners recently warned that new regulations designed to improve lending practices by payday loan companies may fail to protect customers in the near future,

The Finance and Leasing Association (FLA) has issued new guidelines limiting the number of times a payday loan can be rolled over to a maximum of three,

However, payday loan company Wonga is the FLA’s only member, prompting consumer grounds to demand further action.

The bank of England is expected to launch another round of quantitative easing (QE) this week, in the hope of preventing the UK falling into another recession, after the economy contracted by 0.2 per cent at the end of last year.

The bank is likely to pump at least £50 billion into the economy by purchasing government gilts from pension funds and insurers with electronically created money.

This round of QE, which is designed to bring down borrowing costs, follows a £75 billion injection into the economy last October.

Since the QE programme started in March 2009, the Bank has bought £275 billion in gilts.

A final decision on the latest round of QE will be made at this week’s Monetary Policy Committee (MPC) meeting.

Some economists believe that last week’s welcome news that the UK’s manufacturing and services sector has grown to its highest level for ten months may lead the MPC to review the scale of the latest round of QE.

Last week The National Institute of Economic and Social Research (Niesr) called for the government to ease back on spending cuts in order to encourage the economy to grow.

The think tank warned that the UK economy will enter recession in the first half of 2012 if households continue to cut back on their spending.

Niesr forecasts that the economy will shrink 0.1% in 2012, however if the eurozone debt crisis is resolved the UK economy could grow 2.3% in 2013, it said.

“We forecast a return to technical recession in the first half of this year, as households continue to retrench, credit conditions remain tight, and businesses are reluctant to invest given uncertainty about both domestic and foreign demand,” the think tank said in its UK and World Economy Forecast.

Chelsea Building Society has launched a five-year fixed-rate mortgage at 3.19 per cent.

The deal is available on a maximum loan-to-value (LTV) of 70% with a fee of £1,495.

The building society’s product manager Jemma Smith said the product “is the lowest five-year fixed-rate mortgage ever to come to the market which is great for customers wanting longer term security in fixing what is likely to be their biggest monthly outgoing”.

For house buyers seeking a lower fee, Chelsea offers a seven-year fixed-rate mortgage at 3.64% on a maximum 70% LTV, with a fee of £395.

The building society also offers a five-year fixed-rate offset mortgage at 3.39%, on a maximum 70% LTV, and with a £1,495 fee.

Chelsea, which is part of the Yorkshire Building Society, has also withdrawn its ten-year fixed-rate mortgage at 3.99 per cent.

Last week Leeds Building Society launched a new deal which may attract potential house buyers who can’t afford a large deposit.

The Leeds’ two-year discount home loan product is available at a loan-to-value (LTV) ratio of 95 per cent, at a rate of 5.25 per cent.

House buyers who are able to pay a ten per cent deposit will receive a rate of 4.35 per cent.

Leeds Building Society’s Sales and Marketing Director Kim Rebecchi said: “The society is also offering a free valuation up to £335 and free in-house legal services for standard remortgages, to those customers who require help with upfront costs.”

According to the latest research from Santander Mortgages, 53 per cent of potential house buyers are more optimistic about buying a new home in 2012 than they were a year ago, while just 15 per cent are less optimistic.

Eight per cent of Britons believe that they will successfully purchase a new home this year.

The number of people declared insolvent in 2011 in England and Wales declined to 119,850, the lowest level for three years and a fall of 11.3 per cent from a record high in 2010.

There was a sharp decline at the end of 2011, when personal insolvencies fell by 5.6% compared with the last three months of 2010, according to the latest Insolvency Service figures.

The figures include bankruptcies, Individual Voluntary Arrangements (IVA) and Debt Relief Orders (DRO).

Despite the decline, personal insolvencies are still much higher than the average for the past 25 years.

One in 366 people became insolvent in 2011, compared with the 25-year average of one in every 1,600.

Although the figures seem to be on a downward trend, experts warn that the data does not include ‘zombie’ debtors, so the real level of personal debt could be much higher.

Zombie debtors are individual who have entered into informal arrangements with lenders.

While the number of personal bankruptcies fell by 28.3 per cent in the final quarter of 2011 compared with the same period in 2010, the number of IVAs rose by 4.5 per cent and the number of DROs increased by 18.3 per cent.

DROs can only be taken out by people with debts of less than £15,000, and there is the possibility that these individuals could become bankrupt at a later date.

The latest figures from the Bank of England show that consumers made an effort to reduce their debt in the run up to Christmas.

Consumer credit, excluding mortgages, fell by £377m to £207bn in December 2011, representing the biggest monthly drop since records began in 1993.

There was a £400m reduction in overdrafts and personal loans, while credit card lending remained the same.

The Government launches its NewBuy mortgage guarantee scheme in March, which will help house buyers by underwriting 95% mortgages on new-build properties up to £500,000 in value.

The scheme depends on having sufficient sites available to house builders and housing minister Grant Shapps revealed today that sufficient land for 80,000 properties has already been identified.

Mr Shapps said he is now working with the BBC, Network Rail, Royal Mail and public sector organisations such as HM Treasury and the Ministry of Justice to identify further unused sites for housebuilding.

He expects enough land for 100,000 homes to be released by 2015.

The NewBuy mortgage guarantee scheme is an extension of the New Build Indemnity Scheme which was announced in November.

The initial scheme was designed to help first-time buyers, but the NewBuy scheme extends this help to people who wish to move house.

Mr Shapps revealed a number of other measures to boost the housing market, including plans to devolve power from Whitehall to town halls and to allow councils to keep rents collected from council tenants and invest the money in their housing stock.

Councils previously had to surrender social rents to the government, which then redistributed the revenue, leaving some councils with less than half the amount they collected.

Speaking to housing sector organisations, Mr Shapps said: “I’m pulling out all the stops for those who want to get on the property ladder, so from March the NewBuy Guarantee scheme will be on hand to help people buying newly built properties with just a fraction of the deposit they would normally need.”

Nationwide Building Society is launching an advertising campaign to highlight its efforts to support first-time buyers.

The building society claims it is doing more than any other lender for first-time buyers by providing Save to Buy and limited liability guarantor mortgages, online guides to the mortgage process, discounted fees and by participating in New Build Indemnity Scheme.