COVID-19 Europe Fintech

FICO UK Credit Market Report Shows Signs of Early-Stage Delinquency

Global analytics software provider FICO has released its August 2020 analysis of UK card trends which shows the continuing signs of financial stress due to Covid-19. FICO monitors the UK credit market using data reported by the UK’s leading credit card issuers through its FICO Benchmark Reporting Service. FICO’s analysis of August 2020 activity provides a clear picture of the ongoing impact of Covid-19 on consumer finances.

“Although early-stage delinquency rates (missed one or two payments) remain below 2019 levels, the uplift seen in July in consumers missing one payment continued in August and has meant a segment of accounts rolling straight into two missed payments,” said Stacey West, principal consultant for FICO Advisors. “But payment deferrals and furlough payments continue to mask the true scale of the financial stress being faced by many UK adults.

“We believe the levels of financial stress will become clearer in the coming months. Furlough payments were reduced in September from 80% to 70% and in this final month of October will fall to 60%. Although the new Job Support Scheme starts in November for at least six months, this only tops up the salaries of those working reduced hours due to Covid-19. For those whose jobs are no longer viable, financial pressure will start to increase and the approach of Christmas will further compound the situation.”

Card usage and credit

Average spending on UK credit cards increased in August for the third consecutive month, up 6.9% to £639, and was only 4.8% lower than a year ago. For the period January-August 2020, sales were down 1.4%, compared to increasing 4.4% in the same period in 2019.

West added: “As further businesses reopened in August, along with the school holidays, the increase in spending was not unexpected. But expanding regional lockdowns and a potential nationwide lockdown will impact spend trends in the coming months. We will also soon start to see how seasonal spend patterns compare to 2019.”

Mirroring the average spend trend, the percentage of active accounts also increased for three consecutive months, although it remains 6.2% lower than in August 2019. The levels of unused exposure on active accounts remain high, illustrated by 29.5% of accounts having a limit in the range of £5,001 to £10,000 with their average balance being only £1,241.

“The concern remains that with further card usage and Christmas approaching, some consumers will not be able to afford to support their existing spend, much less the unused credit that may be available to them,” said West. “For some, a credit card may be the only spending option available.

“With the FCA’s focus on lenders treating the most vulnerable as fairly as possible, issuers could consider expanding their affordability assessments to include existing as well as new credit to proactively identify in advance those who may have payment issues and offer the most suitable treatment before payments start to be missed.”

The percentage of accounts in credit (have excess funds) and the average amount in credit decreased for the second consecutive month. Accounts < 1 year old continued to see the average amount increase. The average amount in credit remains more than double that seen in August 2019.

West added: “There are now signs of the volume of holiday cancellation refunds slowing. With the end of the summer school holidays and the uncertainty around travel restrictions and refund rights, it is anticipated that the refunds will continue to decrease resulting in pre-Covid-19 values being seen.”

Monthly Payments

The percentage of payments to balance increased in August for the second month in a row. The percentage of consumers paying the full balance also increased in the month – 6.9% higher than a year ago.

“Consumers who took a payment holiday that potentially did not need to are now starting to resume payments and this is driving the uplift and outweighing at present the early signs of increasing missed payments,” said West. “With the end of the furlough scheme and ability to request payment deferrals approaching, along with the introduction of the Job Support Scheme in November as well as the usual increased spending for Christmas, it’s likely that payment trends will continue to be impacted for many months.”

August saw a second month of increase in the one missed payment rates. The percentage of accounts missing one payment has risen 8.4% since June and the value compared to the total balance by 17%. Similar results were seen for the first increase in two missed payment rates since May.

West added: “The continued increase in consumers with one missed payment and this flowing into two missed payments a month later may be the start of the anticipated increase in consumers being unable to resume payments or no longer being able to maintain their existing payment habits.

“With September results likely to reveal early indications of the impact of the reduction in furlough payments, issuers are now focusing on the best ways to support consumers suffering or at risk of suffering financial stress due to Covid-19. New approaches and data will be needed to help identify those affected (on furlough, in vulnerable sectors, resorting to high-interest borrowing etc,) and communicate appropriately with them. Open banking transactional data could form a key part in customer communications whether before or after missed payments.”

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  • Polly is a journalist, content creator and general opinion holder from North Wales. She has written for a number of publications, usually hovering around the topics of fintech, tech, lifestyle and body positivity.

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