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Sharp fall in credit card spending as households shore up savings

The confidence of consumers to return to previous spending patterns remains uncertain, UK Finance said.

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Households ramped up their savings while credit card spending on some services ‘collapsed’ in the first three months of 2020, according to UK Finance (Dominic Lipinski/PA)

Households ramped up their savings while credit card spending on some services ‘collapsed’ in the first three months of 2020, according to UK Finance (Dominic Lipinski/PA)

Households ramped up their savings while credit card spending on some services ‘collapsed’ in the first three months of 2020, according to UK Finance (Dominic Lipinski/PA)

Households ramped up their savings while credit card spending on some services “collapsed” in the first three months of 2020, according to a trade association.

Lockdown restrictions implemented towards the end of March resulted in a sharp drop in “non-essential” retail activity, travel and entertainment spending, UK Finance said.

It said credit card spending had shown a “sharp decline” – shrinking by more than 12% in the year to March, including a 14% fall in purchases.

Buoyant activity in supermarkets and other food stores was “more than offset by a collapse in card spending on travel (down nearly two-thirds relative to a year ago) and entertainment (down by 27% over the same period),” UK Finance’s report said.

The report added: “The confidence of consumers to return to previous spending patterns remains uncertain, not least because labour market prospects will remain fragile for many.”

The sharp reduction in consumer spending has flowed through to a fall in credit card borrowing. We've also seen further increases in deposits held by householdsEric Leenders, UK Finance

With fewer opportunities to spend, cautious households ramped up their savings, particularly into instant access accounts.

The report said: “Limited retail opportunities towards the end of the quarter and a sharp fall in consumer confidence fed through to a 1.3% rise in total deposits at the end of quarter one 2020 compared with quarter four 2019, with the rise in immediate-access saving coming in at 1.9% over the same period.

“Many economists expect to see a sharp increase in the savings ratio, at least in the first half of 2020. This should provide something of a cushion for households until the economy starts to emerge from this crisis.”

Consumers’ total overdraft borrowing with banks and building societies stood at just over £6 billion at the end of the first quarter of 2020 – down from a peak of around £10 billion between late 2005 and 2009.

The amounts outstanding at the end of March were down by around 1% compared with a year ago.

The report said: “We expect this picture to change in coming quarters. This will be driven by the introduction of support measures to bank customers, with personal current account providers offering fee-free overdraft buffers up to £500.”

It continued: “With around 27 million additional overdraft facilities in place, next quarter’s data will shed more light on how these have been taken up by customers.”

Meanwhile, the UK mortgage market in the first quarter of 2020 was “relatively flat”, according to the review.

An upswing in first-time buyer lending in London and the South East was offset by a fall elsewhere in the UK.

Eric Leenders, managing director, personal finance at UK Finance, said: “Following a subdued year in the mortgage market in 2019, any signs we might have seen of improving confidence translating into increased home mover activity at the turn of this year have currently been overtaken by the impact of the Covid-19 pandemic.

“Further evidence of the crisis is evident in unsecured borrowing. The sharp reduction in consumer spending has flowed through to a fall in credit card borrowing. We’ve also seen further increases in deposits held by households.

“This review does not capture the various support measures to households that the industry has enacted, such as three-month payment holidays and a repossession moratorium.

“By mid-May approximately 1.8 million mortgage payment deferrals had been arranged for customers.”

PA