How to stop credit cards driving bad debt

One factor, above all else, drives credit union bad debt, and that is credit cards.

NestEgg’s analysis of credit union defaults reveals a clear pattern: consistently high credit card balances and rapid balance growth (high velocity) result in a default rate that’s 50% higher than the average. Warning signs appear across all credit profiles. In fact, credit score can actually reward some of the behaviours that drive higher credit risk.

Understanding the red flags

Credit card utilisation ratio is the percentage of available credit someone is using. For example, a £750 balance on a £1,000 limit equals 75% utilisation. A fully utilised card is a strong signal that a borrower may be reaching the limits of their financial flexibility.

In the graph below a credit card has been fully utilised:

Credit card velocity – how quickly a balance is growing – adds additional risk insight. For example, a balance rising from £100 to £500 in three months is a £133/month velocity and a potential sign of financial strain. Both high utilisation and high velocity are major contributors to bad debt.

The minimum payment trap

A member with £3,000 on a credit card at 21% APR who makes only minimum payments (1% plus interest) will take 28 years to clear the debt. They will pay £4,000 in interest alone.

FCA rules require lenders to intervene after 18 months of minimum payments. Yet it takes three full years before lenders must offer a structured repayment plan or suspend the card. If borrowers don’t respond, they lose access to credit and may see their score damaged. Limiting their ability to access affordable credit from their credit union when they need it most.

Persistent debt means more defaults

Our analysis of 300,000 credit union loan applications highlights the scale of the issue:

• 1 in 5 applicants carry a credit card balance above 75% of their limit
• These members default 50% more often
• For a credit union with a 3% default rate, loans to members with high utilisation jump to 4.5%

They also:

• Have 10% more existing defaults on file
• Are twice as likely to hold multiple defaulted accounts

High utilisation is one of the strongest and most consistent predictors of bad debt.

When high credit scores hide financial distress

Credit scores can sometimes mislead lenders by rewarding behaviours that actually increase risk. Three common patterns boost scores while masking financial distress:

• Opening multiple cards reduces utilisation ratios. Someone opening new accounts to survive financially may see their score improve even as their situation worsens.
• Balance transfers reset utilisation and lift scores, even when total debt grows. The score sees reduced utilisation, not desperation-driven debt shuffling.
• Limit increases lower utilisation and boost scores, especially for subprime borrowers. Higher limits often lead to higher balances over time, but scores reward the temporary breathing room.

These behaviours mean traditional indicators can miss the early stages of financial decline that contribute to bad debt or higher risk of default.

When balances race to the limit

Long-term high utilisation tells you a borrower is stuck. But rapid balance increases (velocity) reveal the early signs of financial stress, including:

• Loss of income or reduced working hours
• Emergency expenses being absorbed on credit
• Reliance on credit because other borrowing options have dried up
• Structural financial instability where debt advice, not more credit, is needed

Subprime lenders may respond to rapid balance growth by raising limits, fuelling the debt spiral rather than preventing it. Credit unions end up seeing the consequences in the form of higher default rates and increased bad debt.

Introducing smarter credit card risk detection

NestEgg’s Decision Engine now includes sophisticated rules designed to detect and respond to credit card-driven financial stress. Helping credit unions reduce bad debt at the earliest opportunity.

For example, you can configure:

• Referral rules when two or more credit cards have been at 80% utilisation for three consecutive months
• Automatic declines when multiple cards reach 90% utilisation over six months
• Velocity rules that trigger manual review when balances grow significantly over a short period
• Clear decline thresholds for extreme cases, such as balances rising 75% in just two months

These risk detection rules help prevent new lending decisions that could later contribute to defaults.

Why this matters

Every credit union aims to support members with fair, affordable credit. But sustainable lending requires proactive risk management. These new credit card risk rules help you:

• Reduce bad debt by identifying key drivers before defaults occur and impact your portfolio
• Maintain consistency in lending decisions. Manual review of credit card data is time-consuming and prone to inconsistency. Automated rules ensure every application is assessed against the same criteria, aligned with your risk appetite.
• Support responsible lending. Members maxed out on credit cards need intervention, not more debt. By flagging these applications, you create opportunities for financial education, debt consolidation or referral for money advice
• Scale your operations efficiently. As loan volumes grow, maintaining thorough manual credit file reviews becomes impossible. Intelligent automation ensures you don’t sacrifice quality for speed.

Ready to reduce your bad debt?

Intelligent automation can help you lend sustainably, protect your loan book, and support members experiencing financial stress.

Contact us for a demo to see how NestEgg can help.