PwC warns UK credit card business “unsustainable”

by Gill Montia

Story link: PwC warns UK credit card business “unsustainable”

Accountancy firm PricewaterhouseCoopers (PwC) has published a new report warning that the current business model for UK credit cards is unsustainable.

The study, entitled “Precious Plastic”, looks at the way in which “increasing bad debts, funding constraints and the toughest macro-economic climate in a generation” will impact on the industry and consumers.

It points out: “The introduction of the Consumer Credit Directive by next June and recent announcements by the Government with the prospect of further industry regulation adds to the pressure on lenders.”

Total UK household borrowing has remained broadly constant over the last 12 months, although “noticeably high” in comparison to the rest of Europe.

According to PwC, each household has total debt of around £60,000, made up of approximately £50,000 of secured debt and £10,000 of unsecured debt.

The average household will therefore need to spend approximately 15% of its net income purely to service the interest payments.

Furthermore, bad debts in the credit card sector have reached historic highs, standing at nearly 6% of outstanding balances.

PwC partner, Richard Thompson, comments: “Our analysis suggests that bad debts are likely to continue to rise and could reach 9% by the end of 2010.”

As a result, Mr Thompson believes that annual fees will become commonplace and rates will rise.

He concludes: “We’re likely to see credit cards being reinvented as payment rather than borrowing tools.”