Daily Research News Online no. 1804

Spend, Spend, Spend!

August 14 2002

Latest research from Mintel finds a total of £285 billion was spent on credit or debit cards last year in the UK, amounting to £540,000 a minute.

While credit card expenditure is steadily increasing, the growth in debit card spending has been spectacular. By the end of 2001, it was worth more than twice as much as credit card expenditure, and stood at almost £200 million.

Debit and credit card expenditure as a percentage of UK consumer expenditure has increased at an impressive rate from 1992 when consumer spending was £390 billion and credit and debit card spending stood at a little over 15% of this total. By the close of 2001, the total value of debit and credit card expenditure was equivalent to 44% of the £645 billion of consumer expenditure.

Despite having launched some three decades later than the credit card, debit cards are now the most commonly held payment card. The difference is not wide, but it is certainly significant. Research questioning some 2,089 adults finds 56% of consumers holding a debit card and 49% a credit card. One third of adults own neither a credit or debit card, presumably relying on cheques and cash for their day-to-day requirements. Nevertheless, automated payments have taken their toll on cheques. The number of cheques written has fallen by a third in the last decade, with debit cards taking over everyday spending.

Research questioning some 1,025 credit card holders, finds 4% of cardholders owing at least £5,000 outstanding debt, with one in twelve owing a minimum of £2,500. Meanwhile, 15% of cardholders owe £1,500 or more. By contrast, some 37% of cardholders owe nothing or pay off their balance immediately. For those owing £5,000 or more, assuming that minimum payments are set at 3% of the total balance, cardholders would have to pay £150 a month on a debt of £5,000 just to meet this requirement. Even if this £150 a month payment was maintained and not reduced in line with the minimum repayment, it would be almost four years before this debt was cleared on a card with an APR of 14.9%.

For a consumer who consistently made the minimum repayments it would be almost ten years before this balance was reduced to under £1,000, by which time interest payments would have been in the region of £4,700. 'Not only does this indicate the dangers of letting credit card spending spiral out of control, but also the extremely profitable nature of those customers who just rotate a sizeable balance, either paying the minimum or repaying a sizeable amount but letting debt build up again. Although on first glance it may seem that the 37% of respondents who repaid their balance every month would make it difficult for card issuers to profit, it would seem that those who do maintain a balance are more than capable of subsidising those who do not' comments Toby Clark.

Just 22% of 16-24-year-olds cleared their balance every month, half the proportion among the over-65s. While this is not in itself an indication of irresponsible card use, it is somewhat worrying to note that exactly the same proportion felt that there was a danger of letting their card usage go out of control, the only age group in which these proportions were even near to being equal.

At the other end of the age scale, the situation is reversed. Among the over-55s more than two fifths of cardholders repay their balance in full every month, and few feel that they are in danger of using their plastic cards too much. Partly a reflection of greater maturity, this will also be a consequence of the less accepting attitude towards debt among older people.

Overall, some 8% of adults find it very difficult to pay off the interest and always have a balance outstanding, this rises to 10% of those aged 45 and under.

In order to better identify discrete groups of cardholders, Mintel has created three separate groups. The CAUTIOUS cardholders tend to know when they must make their monthly payments, clear their balance every month, and are aware of the APR payable on their account. When expressed in terms of the UK population as a whole, this group would number in the region of 7.2 million consumers. The CAUTIOUS also overwhelmingly describe themselves as using their cards sensibly, in contrast to those respondents identified as having a more CAREFREE attitude towards their payment cards. Not only do they not state that they use their cards sensibly, but they also find it difficult to pay the interest on their balances or feel that they had to exert self-control in order to avoid overusing their cards. This group accounted for 7% of the sample, or around 3.4 million individuals.

A third group, the OCCASIONAL card users, hold a card but rarely use it. They also tend to describe themselves as sensible users, as well as reserving their cards for special occasions or emergencies. Some 10% of respondents shared these characteristics, equivalent to around 4.9 million adults within the UK.

Unsurprisingly, given that interest is what determines how much a credit card will cost a consumer, lower APRs (36%) would be the most powerful incentive to increase spending. No annual fee would tempt 28% to increase their spending. 'Although very few credit cards still attract an annual fee, this does go some way towards indicating the struggle that lies ahead of any provider looking to increase profits through re-introducing the annual fee. It will certainly be interesting to see how many applicants to the new breed of customisable credit card opt for an annual fee in return for a low APR' comments Toby Clark.

The importance of incentive schemes is reinforced by the 14% opting for each of loyalty discounts and reward schemes. Interestingly, the sixth most commonly cited answers, the ability to withdraw cash abroad and to instantly debit money from a bank account are both already available to the vast majority of debit card holders. Seemingly these consumers are simply restating the benefits of their cards, although it may be that this is an indication of a lack of awareness of the facilities available, particularly in the case of foreign cash withdrawals. 'Many card issuers are now actively promoting this aspect of card use, attempting to ensure that as much holiday spending as possible is conducted through their plastic cards, rather than a rival's currency or traveller's cheques operations' comments Toby Clark.

The fact remains that some 38% of adults, the highest response of all, feel that none of the listed options could convince them to increase their spending or take out a new card. As witnessed by the high proportion of respondents who feel that they use their card sensibly and who repay their balance every month, most cardholders are in control of their spending, keeping it at a level with which they are comfortable. For consumers who repay their balance in full, low APRs are of little relevance, and with the majority having fairly small balances on their cards they will see little need for a new card or higher credit limits.