Consumer confidence falls

Consumer confidence is crumbling as the reality of the ‘credit crunch’ starts to bite, according to a new report issued today by uSwitch.com, the independent price comparison and switching service. Shock waves from the fall-out of the Northern Rock crisis, interest rate uncertainty and the slowdown in property prices have left over a third of people (35%) concerned about the impact Britain’s current economic situation could have on their own finances. More than 15 million people (34%) feel financially worse off today, and this in turn is taking its toll on lifestyle and spending plans.More than half of consumers (52%) say that now is not the time to make life-changing decisions such as changing jobs, buying a home or having a baby.

Cutting back

In the last three months, 9.9 million people (22%) say they have cut back on retail spending. Moreover, major purchases such as home improvements and exotic holidays are being put on hold – only 3% think it would be a good time to borrow more against their home for major improvements, such as a new kitchen or replacement windows, 5% a good time to buy a new car, 6% to plan an expensive holiday and 3% to plan a wedding.

However, this scaling back on spending may be too little, too late. Britain’s love of borrowing, fuelled by an era of easy credit, has left consumers more than £1.38 trillion in the red. For some, the love affair has already turned sour. Four million people (9%) are trapped in a vicious circle where they may need to get further into debt to meet existing financial obligations and 5.8 million (13%) may need credit just to help meet their living costs.

Consumers fail to cope with debts

Debt ridden Brits owe more than £217 billion on credit cards and loans. uSwitch.com’s report shows that 10.3 million people – almost a quarter (23%) - feel their current level of borrowing either borders the unmanageable or is no longer manageable. In fact, over the last six months, 5.4 million people (12%) have missed payments on debts and bills and one in ten (10%) have had a direct debit, cheque or payment bounced by their bank as they have not had sufficient funds in their account.

In the last six months, 21% of consumers “maxed out” on at least one of their sources of credit - 11% on a credit card and 10% on an overdraft. Previously that wouldn’t have been a problem – but with Britain’s banks slamming on the lending brakes, the window of opportunity is closing for those looking to move to a better deal.

Bank write-offs soar

In 2006, unsecured lending amounted to £19.6 billion. However, almost a third (£6.6 billion) was written off. This is equivalent to approximately 17% of the ‘Big Five’ banks’ total group net profits (£38.5 billion) on all activities. But, between January and June this year, debt write-offs totalled £3.7 billion – almost as much as the combined retail profits (£4 billion) of HSBC, Barclays, HBOS, RBS Group and Lloyds TSB during the same period. Write-offs by UK banks on unsecured lending have increased by 70% (£3.8bn to £6.6bn) and soared by a staggering 715% on secured lending (£20m to £163m) between 2004 and 2006.

As a result, banks are now reining in their lending. In the last three months alone, over seven million people applied for credit. Of these, 38% were declined a new credit card and 19% were turned down for a new personal loan. Over the same period, 6% had their credit limits cut by their bank. This doesn’t augur well for the two million credit card customers who are expected to be on the market for a new balance transfer offer in January.

Consumer confidence crumbles

The research found that the average person now sees over half (53%) of their monthly take home pay eaten up in debt repayments – 35% on mortgage payments and 18% on other debts. Not surprisingly, the increased cost of borrowing is hitting consumers hard – 23% are more worried about money and 18% are more worried about debt than they were a year ago.

The top five causes of concern among consumers today are:

Feeling less financially well-off (34%)
Reports in the media such as Northern Rock and the “credit crunch” (22%)
Uncertainty over whether interest rates are going to go up again (18%)
Job security is less certain (16%)
Mortgage repayments have/will be going up (12%)

Over the next six months, consumer confidence is likely to take a further battering – only 9% believe that the credit crunch will not impact on the average person. People already think they are in for a bumpy ride. One in ten (10%) think that they won’t be able to pay all their household bills on time, 6% may have to default on credit card repayments and 3% say that their home is at risk of repossession. In fact, according to the Council of Mortgage Lenders, 45,000 repossessions are expected next year and 170,000 homeowners are expected to be three months in arrears.

More worryingly given current levels of indebtedness, only 23% of people would not be left in financial difficulties following a life event, such as they or their partner losing a job, a serious illness or having a child. Furthermore, 16% say that job security is less certain now, but nearly a quarter (23%) admit to having nothing to fall back on if the main breadwinner of their household lost their job, while 17% don’t know what they would have to rely on. In this situation, 39% of Britons would only be able to make ends meet without incurring additional debt for up to 3 months, while 20% would only last a month.

Despite these harsh realities, over a third (36%) of consumers have not changed their behaviour in the last 3 months in response to the economic climate. However, there’s bad news for retailers, especially with Christmas on the horizon. As the credit crunch bites, more than 12.6 million (28%) say they will spend less this Christmas than last year – only 8% plan to spend more. Despite this, one in ten (10%) still intend to borrow to pay for Christmas this year.

Ann Robinson, Director of Consumer Policy at uSwitch.com, says: “This is crunch time for consumers and it couldn’t come at a worse time of year. In the run-up to Christmas, traditionally one of the biggest periods of consumer spending, people are feeling less well-off and are worried about the future. They are concerned about their jobs, their homes and their ongoing ability to manage their debts and bills. The days of easy credit and the ‘buy now pay later’ culture may be numbered, but they will leave a painful reminder for those left struggling with debt.

“More than half our take home pay is now eaten up by debt repayments, but our ability to repay and manage this debt is clearly faltering. The banks are being forced to write-off vast sums and, as a result, they are tightening their lending belts. This means that credit will become both harder for consumers to get and more expensive. The credit crunch will claim casualties – it will be enough to tip some over-indebted households over the edge. But there are positive signs that consumers are already cutting back, curtailing spending and trying to clear their outstanding debt. With a careful eye and a steady hand on the household budget, most should be able to weather the storm.”

According to uSwitch.com, households can save up to £1,000 on household bills and financial products through a simple financial makeover.

Take control of your finances by looking at all the areas where you can save money. Don’t see it as a chore – see it as an opportunity. By saving on your outgoings, you are actually increasing your disposable income.

Be proactive, not reactive. Instead of just cutting back on basics or using credit/store cards to get you through the winter, take the opportunity to cut the cost of your basics (energy, home and mobile phones) throughout the year and check rates on credit cards, loans and insurance.

Above all, stay in control. It’s easy in the face of feeling impoverished to let go of the spending reins altogether. Recognise that risk and don’t fall victim to it – otherwise the ‘skint cycle’ just gets prolonged.

Keep your eye on the prize! Work out your monthly income and outgoings so you know your disposable income. Look at how much you could save by switching. Then look at that amount as a percentage of your disposable income and imagine how chuffed you would be if your boss offered you a pay rise of that magnitude. Never forget that every saving made is a boost to your disposable income.

The most important thing is don’t feel impoverished – feel empowered!