Lenders expect higher credit card demand and default rates in coming months as household finances squeezed

British lenders are seeing increasing demand for credit card lending and higher default rates, according to an official survey, as households continue to struggle with economic pressures and high borrowing costs.

According to the Bank of England’s latest quarterly credit conditions survey, lenders saw default rates for both credit cards and other unsecured lending increase during the first three months of 2024 and expected them to rise again in the second quarter.

An index of lenders’ experiences with defaults on unsecured loans in the second quarter showed a reading of +17.6, compared with a 14-year high of +31.7 that was expected in last quarter’s survey, suggesting they have been too pessimistic.

Lenders also saw default rates on secured loans to households, including mortgages, increase in the first quarter and expected them to rise again in the second quarter.

Although losses given default – the estimated amount a lender loses when a borrower defaults – reportedly fell in the first quarter, lenders expected it to rise over the next three months.

Higher default rates come as lenders reported a rise in demand for credit card lending during the first quarter and expected it to increase again in the second quarter, suggesting that households are still widely relying on borrowing amid the cost-of-living crisis.

While demand for other unsecured lending reportedly remained unchanged, it was also expected to increase in the second quarter.

Lenders also saw a rise in demand for mortgages in the first three months of 2024 and expected it to increase again in the second quarter.

Although mortgage rates have come down since the end of last year amid the UK’s improving economic picture and fierce competition within the market, they remain elevated in line with the Bank of England’s base rate.

Interest rates were hoisted to a post-financial crisis high of 5.25 per cent last year, putting pressure on a households having to refinance loans taken out when the cost of borrowing was much lower.

Karim Haji, global and UK head of financial services at KPMG, said: “Considering inflation is now falling and is expected to drop to below the Bank of England’s two per cent target in the months ahead, rising demand for credit card lending in Q1 suggests a more positive economic outlook hasn’t fed through to household finances yet.

“Defaults across all unsecured lending increasing over the same three-month period indicates many people are still struggling to meet their day-to-day costs. Lenders will need to be vigilant and continue to offer support for borrowers in the interim.”