Credit card borrowing is predicted to fall to its lowest level since records began thanks to 'unprecedented changes' to the economy caused by COVID-19.
Economic forecasters at EY predicted that credit card debt could plummet by as much as 16% by the end of the year, as the amount people paid off on their personal debts overtook borrowing during the lockdown period.
The experience of Coronavirus is likely to leave many spenders wary and cautious about borrowing, which researchers said could delay a return to pre-pandemic levels of debt on plastic until 2022.
EY's Head of UK Banking Dan Cooper said:
Even assuming the economy bounces back in the short term, we're likely to see very weak growth in loans to home buyers and consumers for some time to come
If true, this would mark the sharpest fall in personal borrowing in over 25 years.
Last month, data from the Bank of England revealed that UK households cleared astonishing amounts of debt over lockdown, as businesses closed for trade, prompting people to pour their money into savings and debts instead.
The BoE figures showed that debt which would normally take five years to pay off was cleared in just five months, as borrowers funnelled a collective £18.2 into personal debts between February and June.
But more debt-free consumers does not mean the end of money woes.
The same EY report predicts that mortgages are likely to get harder to come by, and the number of write-offs is expected to jump.
According to the researchers, banks are likely to tighten up their lending standards in a bid to balance the books.
As a result, mortgage lending is expected to grow by only 2.6% this year, despite the stamp-duty holiday and relaxed rules around home viewings.
COVID-19 has caused unprecedented challenges for the UK economy, putting a financial strain on both businesses and households, and has resulted in a staggering amount of money being lent to firms over a short period of time. With a weakened economy, banks face increasing write-offs on all types of lending and, with slow growth for consumer credit forecast, this will add pressure to their profitability and ultimately their ability to lend.said Managing Partner of EY's UK Financial Services, Omar Ali.
As banks remain uneasy about lending, rising unemployment levels will also contribute to a slow recovery, the experts said.
On top of this, the percentage of personal debt which gets written off could approach the highest levels in a decade next year.
The forecasters predicted that write-offs could jump from 1.0% in 2019 to 2.5% next year, as people struggle to make loan repayments due to the knock-on effects of the virus.
Despite the bleak outlook for consumers, government-backed assistance is expected to speed up recovery:
Banks went into this crisis well capitalised and, despite the level of contraction in GDP this year, which the OBR says is likely to be the biggest decline for 300 years, they have extended significant levels of support to businesses and consumers and are continuing to help drive the economic recovery.said Mr Cooper.
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