UK consumer credit demand soars

Consumer demand for credit cards has soared as payday lenders retreat from the market, but concern is mounting that looser lending criteria risks creating another credit bubble.

A recent report by the Bank of England shows that the availability of credit cards and personal loans increased in the first few months of the year.

It comes after demand for credit cards shot up in the last quarter of 2014 to reach the highest level since the financial crisis began in 2007.

Banks are loosening lending criteria in an attempt to capture market share, stoking concerns over consumers' affordability.

In its latest credit survey, the BoE said "the average credit quality of new credit card lending decreased" in the first quarter.

Banks are also making it easier to obtain credit cards while offering increasingly competitive rates to lure borrowers.

Barclaycard, Halifax, Tesco Bank and Virgin Money all have a zero per cent balance transfer offer for 35 months or more, before the annual percentage rate shoots up to 18.90 per cent, according to data site Moneyfacts.

"The credit card market has heated up due to lenders trying to compete to be the top of the best buy tables," said Charlotte Nelson of Moneyfacts.

"The longest deals are getting the headlines but customers need to be aware of costs that will come into play after the deals end."

Consumers have partly been attracted by "successful marketing campaigns and product enhancements", including lower rates, the central bank said.

But banks are jumping in at a time when many payday lenders are being squeezed out by new regulations designed to stamp out irresponsible lending.

Earlier this week, Wonga, the UK's largest payday lender, reported its first annual loss of more than £40m in 2014 as a result of the tougher conditions.

Of the 400 payday services in existence last year, 99 per cent are expected to be forced out of business by a cap on the fees and interest they can charge, which came into effect at the start of this year.

Concern is now growing over banks stepping into the void by handing loans to less creditworthy borrowers

James Daley, founder of consumer site Fairer Finance, said: "If banks start to move down the scale and lend to those less able to afford it, then it is quite possible we are laying the roots of the next credit crunch."

Banks had a responsibility to ensure borrowers could genuinely afford the credit, he added. "Credit card issuers do not always do proper affordability checks - it is a very competitive market with balance transfers at zero per cent for as long as three years, and the bar to get those [deals] is fairly low."

Regulators could soon clamp down on the credit card market as a result. Mr Daley noted the Financial Conduct Authority imposed rules last year on mortgage and payday lending and that it would be "no surprise" if credit cards followed suit. The FCA launched a competition review into the UK's £150bn credit card market at the end of last year.

Mr Daley added: "Lenders rushing in to grant credit to borrowers without running decent affordability checks to ensure borrowers can really afford it could see it come back to bite them in a few years."

Mike Trippitt, an analyst at Numis Securities, said banks were stepping back into the credit card market after a "relatively long break", with keener pricing and enticing balance transfer offers. "Virgin Money, for example, is expecting to triple card balances by the end of 2018," he said. "So, yes - banks are taking on more risk but, as always, it depends on how it's priced."

He explained credit risk was "pretty low" thanks to low interest rates while banks were still able to capture "generous" margins, in spite of competition.

But Gillian Guy, chief executive of Citizens Advice, said credit cards were the second-biggest debt problem the charity dealt with, although it was seeing a shift towards "priority debts" such as council tax or rent arrears.

"There is high demand for affordable, accessible credit, so more choice for consumers is important, particularly if it means consumers moving from high-cost credit to more mainstream products," she said.

She warned that a sharp increase in the amount of debt being taken out "should always set alarm bells ringing".

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