Younger generation shunning credit cards

Consumers are shunning credit cards in favour of debit cards, digital payment and payday loans, according to a new report from PricewaterhouseCoopers (PwC).

Although UK households paid off some unsecured debts in 2011, the average debt was around £7,900 at the end of the year.

The Ernst & Young Item Club has also reported a trend for consumers to shun banks and seek credit from alternative sources.

It claims that bank and building society lending to individuals has decreased by 23% since 2007 while lending by alternative lenders, including payday loan companies, has increased by 42% over the same period.

Speaking to the BBC, Neil Blake, senior economic adviser at the Item Club, said: “The contraction in consumer credit is driven by lack of demand to an extent, but we just need to look at the phenomenal rise in payday loans to see that the focus on decreasing demand masks a shift towards alternative providers.”

According to the PwC report, total outstanding credit card debt fell by 5% in 2011, with an average card balance of £1,000 at the end of the year.

In contrast, debit card usage continued its upward trend and increased 10% last year, making it the most used payment method over cash.

Simon Westcott, director of PwC, highlighted the use of digital payment methods, especially among younger people and suggested that credit card usage could continue to decline.

Mr Westcott commented: “This generation seems unlikely to switch to increased credit card usage in later life, as perhaps they would have done in the past, suggesting that debit cards, mobile payments and other innovations will force the credit card into an ever decreasing market.”

The use of payday loans, which offer a much easier application process than other forms of credit, is increasing at a ‘phenomenal’ rate according to the Item Club’s Mr Blake.

However, although payday loans can be affordable if they are paid off at the end of the term – usually around a month – rolling them over can lead to a spiral of debt because of their extremely high interest rates.

Consumer rights campaigners recently warned that new regulations designed to improve lending practices by payday loan companies may fail to protect customers in the near future,

The Finance and Leasing Association (FLA) has issued new guidelines limiting the number of times a payday loan can be rolled over to a maximum of three,

However, payday loan company Wonga is the FLA’s only member, prompting consumer grounds to demand further action.

Read More: Finance Markets – Credit Cards