It was 2007 when the recession hit, bringing about bank collapses, falling house prices, plummeting savings rates, a slump in employment and of course a huge reduction in the availability of all types of credit, as increasingly nervous banks cracked down on lending. In fact one of the few areas to see a rise during the recession was the interest rate on credit, which soared as banks attempted to cover what was now the risk of lending.

Even before the economy went into full-blown recession, the term “credit crunch” became so widely used to describe the financial turmoil the country had entered that it can now be found in the latest edition of the Oxford English Dictionary. But what actually changed in the way banks were issuing credit and how did consumers respond?

A number of inevitable changes in the credit market started with fewer card applications being accepted, while higher interest rates and reduced credit limits ensured the banks further diminished the risk of lending. As borrowers struggled to pay off debts that were only increasing with the interest rates, missed payments led to many people attaining poor credit scores, just at the moment when credit card providers were consulting credit reports ever more keenly to assess the potential danger of giving out unsecured credit to those unable to repay it. In addition rising unemployment rates and reduced salaries meant consumers simply didn’t have as much disposable income and their financial focus switched naturally to saving. Others became too wary to borrow or use existing credit cards and the whole notion of borrowing went steadily out of favour. With credit seeming ever more unappealing, it seemed that the country’s love affair with credit would be over.

However while many have stated their fears and concerns over the state of the economy and their own finances, it seems that coming out of recession, people’s financial habits haven’t changed all that much. Money High Street reported back in November 2010 on research carried out by HSBC into how the recession had affected spending, saving and borrowing habits. It’s a rather conflicting statement but the research found that while more than 75% of the 1100 adults surveyed claimed to be concerned about the economy and uncertain of their own income in the future, almost 70% have done nothing to change their financial habits.

The reasons for this and whether it is representational are unclear, but 2011 has seen consumer borrowing rising once more, with a 3% increase in January, as consumer confidence returns. Credit card providers are keen to pick up these new customers; as mentioned previously on this blog, there are currently great deals to be had by consumers with good credit scores. So after the economic gloom of the past few years, conditions for borrowing and lending are finally improving.

The recent boom in generous introductory credit card offers has invited comparisons to pre-recession deals and levels of spending. Steve Lodge at The Financial Times last week reported that ‘new credit card offers have surpassed pre-crisis levels of generosity,’ while the BBC stated that consumers’ mortgage and credit card borrowing has risen, with unsecured debt climbing by £768m in February 2011. So the outlook for the financial market is certainly improving, signalling good news for all those involved in it, but how do the current deals compare to what was on offer before the economy took a nose dive.

In the years leading up to the recession, consumerism was rife, with a ‘buy now, pay later’ mentality gripping the nation. Eager borrowers found it easy to obtain credit whatever their credit rating, and as a result personal debt soared. With so many consumers keen to borrow money, credit card providers had little incentive to offer a competitive service. While introductory offers were present, they simply didn’t need to be as generous as today’s cards.

An example of a highly-regarded credit card offer from April 2008, shortly before the start of the recession, is the Halifax All in One Card which offered an introductory 0% period of 10 months for both purchases and balance transfers, with a balance transfer fee of 3%. Today there are a whole host of cards that can better this deal. Barclaycard offers a 12 month 0% introductory deal covering purchases and balance transfers, with the fee for transferring a balance slightly less at 2.9%, and with a 25% discount on the fee for any additional balance transfers. Sainsbury’s has the same initial 0% deal of 12 months, with a 3% balance transfer fee, and existing Natwest and RBS customers are eligible for its 13 month 0% purchase and balance transfer card, with a 2.9% balance transfer fee.

Back in 2008, once the effects of the recession began to be felt, borrowers immediately started to rein in their spending. This was obviously bad news for the credit card providers and many raised their APRs, making the average 17.9%, which compared with today’s average rate of just below 17% again shows a marked difference in the way lenders approach the market.

Next week I will follow the journey of credit card borrowing through the dark days of the recession to see how the market fared during the downturn.