A MAJOR internet bank yesterday reported a 40% jump in the number of loan customers turning to debt management companies over the past three months.
Amid industry concerns that UK consumers are struggling to meet commitments, Egg said levels of bad debt had been worse than expected in its loans and credit card business over the third quarter of the year.
Further signs of belt-tightening came from official figures showing lower retail sales. Credit card borrowing was down again last month.
It is expected that the total number of insolvencies this year will top 100,000.
One explanation for the increase is the trend for individual voluntary arrangements (IVA), which allow people to repay a set amount of their debts each month in exchange for having interest payments frozen.
This was confirmed yesterday by Egg's owner Prudential, which said there had been a "marked increase" in loan customers using IVAs, debt management companies and in some cases bankruptcy, to alleviate their debt burden.
It said the number of people using debt management companies in the three months to September 30 was up 40% on the previous quarter. Egg usually recovers less money from customers using IVA arrangements.
The Pru also noted lower than expected borrowing on Egg credit cards as customers cut back on spending.
As a result, the Pru now expects the Egg business to report an operating loss in the second half of the year, similar to the deficit seen in the first half. Egg made losses of £39m for the six months to June 30, compared with profits of £13m for 2005.
Pru said, "During the third quarter, Egg has been affected by a marked deterioration in market trends that are being seen across the banking sector."
The comments from Egg will add to signs that higher interest rates are starting to impact on spending habits.
The British Bankers' Association (BBA) said "noticeable weakness" in the consumer credit market had continued into September with a negligible rise in personal loans and overdrafts and a £76m drop in credit card lending.