Global analytics software provider FICO today released its June and July 2020 analysis of UK card trends which shows the first signs of payment deterioration post 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 June and July 2020 activity provides a clear picture of the ongoing impact of COVID-19 on finances.

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“Whilst we are seeing very low early-stage delinquency rates (missed one or two payments), we know that payment deferrals and furlough payments are masking the true scale of the financial stress experienced by many UK adults,” explained Stacey West, principal consultant for FICO Advisors. “Once these arrangements come to an end, mortgage and loan payments will be the higher priority, which is likely to mean the impact on credit card payments could be significant.

“It is worth noting that historically, accounts that are more than five years old have been the lowest risk segment. However, there are signs they could be the most impacted as a result of COVID-19 so we will be monitoring this. Early signs of deterioration were seen in July for one-missed-payment rates.”

Spend on UK cards starts to increase

After the dramatic fall in average spending on UK credit cards for January to May 2020 (down 27 percent year on year), spending in June started to increase, up 13 percent on May and by a further 11 percent in July to £598. For the period January-June 2020, spending on cards dropped 8 percent year on year.

West added: “The increase in spending in June was expected, as additional business sectors were able to reopen. And with further restrictions lifted in July on hotels, gyms and attractions, this trend continued. Although regional lockdowns were introduced, as consumer confidence grows or as consumers turn to credit cards as the only spending option, we expect that spend will continue to increase in the coming months.”

Card usage starts to stabilise

In line with the increase in average spend, the percentage of active accounts started to stabilise and marginally increased in both June and July, although it is still 6 percent lower than in July 2019. But consumer caution was still evident, with the percentage of the card limit utilised on active accounts reaching another over two-year low.

During June and July, overall card limits again reached their highest levels since at least 2002 and remain noticeably higher than in April 2008, during the last financial crisis. The highest percentage of accounts (30 percent) have limits in the range of £5,001 to £10,000; however, their average balance is £1,207.

West adds: “With the spending options expanding and starting to include higher-ticket sectors, we expect further card usage in the coming months. The concern is whether that extra available credit is affordable to the consumer, especially when the government support and payment deferrals end, and particularly if this is the only spend option they have.”

Accounts in credit remain impacted by refunds

The percentage of accounts in credit (have excess funds) and the average amount in credit continued to increase in June, although there was a drop in July. The percentage of accounts in credit fell by 2 percent and the average balance by 2 percent.

Accounts in credit are still 34 percent higher than a year ago and average balance is 108 percent higher than a year ago.

The main driver in June continued to be the refunds due to cancellations of holidays because of the pandemic. The drop in July can be attributed to these refunds slowing down.

West added: “As the country list for no travel or quarantine on return is being reviewed and updated on a regular basis, we anticipate this trend continuing into August. Once the refunds have been processed and confidence in uninterrupted travel increases, we expect the levels of accounts in credit to return to those pre COVID-19.”

Accounts over their limit continue to fall

The percentage of overlimit accounts continued to drop in both months, although the rate is slowing. It was 41 percent lower than a year ago. However, for those accounts that are over their limit, the average amount continues to increase and is 32 percent higher than a year ago.

West added: “Over the coming months, if the number of consumers deferring their payments remains stable or increases, more will exceed their limit as interest is applied with no corresponding payment. Combined with some consumers reducing their payment amounts, and the increasing number of accounts that would have qualified for a higher credit limit prior to the pandemic also starting to breach the limit, there could be a higher proportion of accounts qualifying for persistent debt treatment. Issuers will, therefore, need to respond with different strategies for this group of customers.”

Monthly payments start to rally

The percentage of payments to balance fell in June (reaching over a two-year low), but in July increased to 28 percent although they are still 14 percent lower than July 2019. The percentage of consumers paying less than the amount due decreased in June and July, potentially as more consumers requested a payment deferral. However, the percentage of consumers paying the amount due increased 27 percent in June and levelled off in July, at 9 percent higher than a year ago.

“The payment data indicates that more consumers will find themselves falling into persistent debt, which means that issuers will need to think about what approach they take with those entering the process due to COVID-19. The options available may have to change to accommodate them. Payment trends are expected to be noticeably impacted into 2021 as consumers’ ability to make their monthly payments or not becomes clearer,” predicted Stacey West.

Early signs of deterioration in one missed payment rates

June saw further decreases in the early delinquency (missed one or two payments) levels. However, in July the percentage of accounts missing one payment started to increase.

West added: “The increase in accounts with one missed payment in July could be attributed to the first significant wave of expiring payment deferrals and consumers finding themselves unable to resume payments. The coming months will show the full impact.”

New account openings begin to stabilise

June and July saw the fall in the percentage of new accounts (compared to total accounts) stabilising, although it is 59 percent lower than a year ago; new account openings January vs. July was also 45 percent lower, compared to a 47 percent increase in the same period in 2019.

West added: “It may take many months for the confidence to offer new credit to consumers to increase, as uncertainty remains as to the level of financial difficulty that will emerge into 2021.”

Cash spend on cards

Unsurprisingly, given the big focus on contactless and online payments during the height of the pandemic, the proportion of cash spend on cards to total spend continued to decrease in June and July, reaching another over two-year low, 35 percent lower year on year

In the period January to July 2020, the percentage of consumers using cash on cards fell 50 percent, compared to 3 percent growth in the same period in 2019.

These card performance figures are part of the data shared with subscribers of the FICO^® Benchmark Reporting Service. The data sample comes from client reports generated by the FICO^® TRIAD^® Customer Manager solution in use by some 80 percent of UK card issuers. Issuers wishing to subscribe to this service can contact staceywest@fico.com.