Tighter Credit Card Criteria Could Mean More Secured Lending

Michelle Tuvey Michelle Tuvey | Loan Underwriter

Credit cards and secured lending have long competed as ways for consumers to borrow without taking out personal loans. It is not that personal loans are necessarily bad; it's just that credit cards are more convenient and secured loans can be had for tens of thousands of pounds. Now it looks like secured lending could get a boost as banks are creating a tighter credit card environment in an attempt to slow down consumer spending.

The Telegraph's Tim Wallace published an excellent piece on 13 April detailing how Britain's credit card binge could be coming to an end. New concern over credit card spending comes on the heels of revelations that the growth of credit card debt in Britain exceeded 10% in 2016 as banks generously continued offering zero or near-zero interest rates to new customers. They are now rethinking that strategy.

Even the Bank of England is worried that British consumers might be overextending themselves. The BoE has said there is a real possibility of banks running into trouble should there be another economic downturn in the near future. They have started to respond by setting stricter standards by which they will approve new credit card applicants. Roughly a third of banks plan to tighten their criteria during the next quarter, according to the BoE.

Secured Lending to Pay off the Debt

With all of this now on the table, you might be wondering why tighter credit card criteria would mean an increase in secured lending. Well, there are two reasons. First, consumers who planned to get new credit cards in order to finance things like home improvements and travel may suddenly discover they are no longer eligible for the low-interest cards they were hoping for. They can still borrow if they have sufficient equity in their homes. For that reason alone, secured lending could enjoy modest growth even as credit card borrowing declines somewhat.

The second reason, and perhaps the more important one, is the reality of the BoE's warning. Any risk to lenders in the event of an economic downturn is directly related to the consumer's ability – or a lack thereof – to repay credit card debt. A credit card crisis in the future would inevitably lead to larger numbers of consumers using secured loans to consolidate their credit card debt. We can even see banks offering secured lending to credit card customers already in trouble.

Secured lending is the perfect solution to credit card debt on many levels. It is cheaper to service for consumers, and it is beneficial to banks inasmuch as it replaces unsecured debt with a secured loan where home equity is put up as collateral. Banks would then have tangible property to fall back on in the case of a default, instead of empty promises to repay.

Take a Look at Your Credit Cards

As a consumer, it is worth considering the BoE's warning of the potential for a future economic downturn. Look at it this way: it's always best to prepare for an economic downturn because you never know when one will occur. The one thing we do know is that downturns are an inevitable part of the economic cycle. For every economic upswing, there is a commensurate downturn as markets correct themselves.

If you are among those consumers that have allowed credit card spending to get out of control over the last 12 months, perhaps it's time for you to consider secured lending as a way out. Use the equity in your home to raise the financing necessary to pay off those credit cards once and for all.

Sources:

Telegraph – http://www.telegraph.co.uk/business/2017/04/13/banks-crack-credit-card-lending-borrowing-binge/

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