How cost-of-living crisis has hit card spending

The cost-of-living crisis in the UK has hit consumers hard, with a majority saying they expect their financial situation to worsen over the next twelve months, and the number of those saying they are in financial difficulty rising.

Meanwhile, consumer use of Buy-Now-Pay-Later (BNPL) products continues to rise, despite use of these instruments now being included in consumer credit reports.

1 in 7 UK cardholders in trouble

Around 16 percent of cardholders surveyed by Auremmia Research believe their financial health is poor —up from 11 percent a year ago.

More worryingly, nearly half (45 percent) of cardholders describe their financial health as poor or fair. This is driven largely by those who hold long-term debt on their credit cards, known as “revolvers”, and those under 45.

“Four in five UK cardholders say they will cut spending for the rest of 2023.”

UK cardholders are also becoming increasingly polarised about how their financial health will change over the next 6 months.

42 percent believe their financial health will worsen (vs. 37 percent this time last year, while 33 percent believe it will improve.

Older cardholders are more likely to expect their financial situation to worsen, while younger cardholders are more likely to expect it will improve.

Auremmia say that such pessimistic outlooks are likely a direct consequence of lower consumer confidence, driven by the rising cost of living, economic and political instability and fears of a recession.

In response to the rising cost of living, no less than four in five (78 percent) of UK cardholders say they will cut back their spending – a figure that’s risen 11 percent in a year.

Across the UK, this has already begun to effect shopping, holidays and going out. While 57 percent of cardholders expect to reduce outstanding balances, 43 percent expect to remain in debt and 29 percent expect to borrow more, up from 20 percent a year ago.

Among those borrowing more to afford necessities, fewer are turning to their existing credit cards in wallet than last year, opting instead to overextend their debit lines or overdrafts given the lower rates of interest on those products compared to credit cards.

BNPL gains ground

In the midst of these credit difficulties, many consumers are turning to BNPL products to help them finance their lifestyles.

Following explosive growth in the popularity of BNPL, the UK Financial Conduct Authority (FCA) introduced guidelines in 2022 which effectively brought BNPL into line with other credit products in terms of their inclusion in assessments of a consumer’s overall financial health and creditworthiness.

Despite now being included in consumer credit reports, the average Brit’s enthusiasm for BNPL remains undimmed.

New data from TransUnion reveals that almost four in ten Brits (38%) used a BNPL product to finance purchases of up to £500 in total last year, with much of this purchasing in the retail and clothing sectors.

PCM Says: As these figures show, consumer appetite for BNPL has not decreased despite the inclusion of BNPL debts on credit reports – though how many consumers are really aware of this change is an open question.

Of greater concern is that, despite more than a year of rising interest rates and stagnant wages, some consumers are choosing to add to their debt load rather than cutting spending.

The FCA should be communicating better on their (correct) decision that BNPL is just another form of credit, and that purchases on BNPL may be different to credit cards, but they are still borrowing – whatever form of credit they choose.

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