More borrowers are turning to subprime credit cards thanks to the pandemic

Data shows that consumers who have to borrow to finance their daily spending risks bear the brunt of higher borrowing costs as they find themselves having to turn to more expensive lenders.

The number of new “subprime” borrowers taking out credit cards rose 143 percent between August and September, according to analysis from credit reference agency Equifax, more than double the increase in the number of borrowers taking out cards overall.

While the number of new cards obtained two months ago is still 60 per cent below the pre-lockdown levels seen in March, the figures show that people in financial trouble are being turned away by regular lenders and resorting to more expensive cards rather than that.

Equifax identifies top-tier borrowers based on their credit profile rather than the nature of the card they’ve applied for, but “subprime” credit cards typically come with an APR of more than 35 percent and lower credit limits, compared to the average borrowing rate of 25.2 percent. Cent.

They usually target borrowers who have been rejected from major lenders.

Paul Heywood, Equifax’s chief data and analytics officer, said the rise was “a warning sign that a growing number of consumers may be experiencing financial hardship.”

Figures released by the Office for National Statistics on Tuesday found that the UK unemployment rate rose to 4.8 per cent by the end of September, with a record high of 314,000 in the third quarter of this year.

The British National Statistician has also found that an increasing number of Britons are having to resort to borrowing or dipping into their savings to finance their cost of living.

Meanwhile, the Financial Conduct Authority has estimated that nearly a third of adults have had their incomes affected by the coronavirus pandemic.

Typically, consumers will only have to turn to sub-prime cards if they are deemed less creditworthy.

However, Britons of all stripes may find themselves having to turn to high-cost lenders because banks shy away from the prospect of extending unsecured credit when there is less certainty that borrowers will be able to repay it.

A survey of lenders by the Bank of England in mid-September showed that banks and credit card companies expected the availability of credit cards and loans to decline in the last three months of this year as lenders also tightened their credit scoring standards.

At the same time, they expected increased demand from borrowers, which meant that many major banks could be turned away and have to turn to higher-cost credit cards instead.

When these funds were checked for pre-approved credit cards on the Experian credit reference agency website, we only got secured cards with a representative APR of 35 percent or higher, despite an excellent credit score.

John Crosley, Head of Money at comparison site Marketplace, said: “Increasingly, we’re seeing a range of credit card providers tightening eligibility criteria.

This may mean that those who were able to secure interest-free card pre-closure with their lender may not be able to do so now, and so there has been an increase in “mortgage” credit card applications.

Many people worry about being able to access money when they need it, even if that means signing up for higher interest rates compared to “prime” lenders.

“For some, it may be the difference between being able to purchase or give away essential items.”

These cards have also become more expensive during the pandemic in some cases, despite the Bank of England lowering its base rate to a record low to theoretically reduce the cost of borrowing.

While the annual interest rate for credit cards from major lenders has barely budged, a spike in purchase rates on provider NewDay mortgage cards pushed interest rates to an all-time high of 25.5 percent in June, according to figures from Moneyfacts.

And the cost of borrowing is likely to rise even for those who don’t have to resort to cards with higher interest rates, as the number of available interest-free deals continues to decline.

Andrew Hager, founder of personal finance website Moneycomms, said: “Major lenders will tighten their underwriting standards which means more borrowers will have to turn to sub-prime card options.

“Acceptance rates on non-core cards are higher because the standards are less stringent but the downsides are that interest rates are much higher and credit limits are often very small, usually £300 to £1000.”

John Crosley added: ‘At a time when family finances are under strain, there are a variety of high quality specialist lenders on the market who help with individual needs. It always pays to look online to see what options are available and to use a simple eligibility checker to see what deals you can accept without hurting your credit score.