Credit card borrowing fades as payday loans rise

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Media captionNeil Blake, Ernst & Young Item Club: "People are finding there is no alternative to payday loans"

Demand for credit cards is "feeling the strain" as UK borrowers turn to other forms of finance, a report has said.

Households paid off some unsecured debts in 2011, but were still left with an average debt of about £7,900, PricewaterhouseCoopers (PwC) said.

But credit cards were facing a "mid-life crisis" as people used debit cards, digital payments and payday loans instead.

A separate report described the payday loan expansion as "phenomenal".

However, there are no official figures that can chart the reported rise in payday loan use.

Youngsters' choice

The number of credit cards in circulation and total credit card borrowing both fell in 2011, the PwC report said.

It suggested that UK consumers were turning to other forms of payment, even though the average credit card balance stood at about £1,000.

Debit card use had increased by 10% last year, while many people - especially the younger generations - were happy to use digital payments, such as using their mobile phone.

"The challenge for banks is how to sustain market presence in the face of competition from ambitious giants and other new entrants," the report said.

This could include a return to annual fees for credit cards, the PwC suggested.

Credit squeeze

The amount of debt being written off by credit card companies fell from its 2010 peak, according to the report.

However, the tighter lending criteria introduced by these providers could have pushed some people to other forms of borrowing, such as people who were refused a credit card getting payday loans instead.

PwC suggested that, given a choice, some consumers now saw these high-cost, short-term loans as a better option.

"Mainstream lenders should be alert to the possibility that what may have begun as a relationship of necessity, may endure as consumers are pleasantly surprised at the convenient and innovative service they receive from these smaller, more agile providers," the report said.

This was backed up by a forecast by the Ernst & Young Item Club, which predicted that this shift to payday lending would continue - especially to poorer borrowers. It described the rise in payday loans as "phenomenal".

"Households that fall outside of the credit terms of traditional lenders are increasingly looking toward other credit providers, regardless of the cost," said Neil Blake, the club's senior economic adviser.

"With banks expected to further tighten lending conditions, we expect the shift towards alternative lenders to continue unabated."

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