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Surviving the credit crunch
If you’ve been turned down for a credit card or a loan, or found that your credit limit has inexplicably been reduced, you’re probably feeling the effect of the consumer credit crunch.
Various market factors have resulted in banks being less willing to risk their money lending to unreliable people. Recent figures indicate that as much as 40 per cent of all mortgage applicants could now be classified as “problem borrowers” facing higher interest rates or even being declined altogether (The Mortgage Lender, 2007).
But there are ways to curb the impact of the credit crisis, and even make some money from it.
What caused it?
For years now spenders in the UK have enjoyed a credit boom with ever-increasing limits on their credit cards to go with the UK’s ever increasing personal debt mountain - now standing at a mammoth £1,363 billion (CreditAction, 2007).
This trend in dishing out loans, credit cards and mortgages to almost anyone - with little thought as to their ability to repay them - caught up with the US market over the summer. Having lent too much money to “sub-prime” borrowers with poor credit ratings, banks found themselves with record levels of defaults, arrears and repossessions as borrowers struggled to sell their homes or keep up with repayments.
In turn, this restricted banks’ ability to lend to individuals and businesses - and each other. The interest rate on wholesale lending between banks started to rise, making it more expensive for banks to get funds.
And then of course there was the Northern Rock bank run - the first since Victorian times. Triggered by the news that Northern Rock had received an emergency loan from the Bank of England, concerned savers withdrew billions over a few days.
These factors, combined with new international banking rules that say banks must now allocate funds to cover unused credit, mean that credit is now much harder to come by.
How will this affect you?
This all depends on what you’re like with money; being a hoarder or a splurger will make all the difference.
The good news for savers is that with borrowing rates unfavourably high between banks, they’re hoping to use more of your money instead. It’s cheaper to use people’s savings than to go another bank or the Bank of England for a loan so many banks have hiked the interest rate on their savings accounts to entice you and your money.
If you’ve got savings, and no debt, now will be the perfect time to take advantage of the new deals on the market. Our current best buy savings accounts are the ICICI HiSave account, the Alliance & Leicester Direct Saver and the Abbey eSavers Account - all offering 6.3 per cent interest and instant access.
The bad news is for borrowers, as it is people with, or in need, of credit who will feel the pinch. There is more than one way in which the credit crunch will affect borrowers; anyone applying for a credit card, mortgage or loan will be affected. And its not just first-time buyers and regular defaulters who will suffer; Standard and Poor’s, an international ratings agency, recently warned that borrowers with poor credit ratings could face mortgage rate increases of up to 60 per cent.
A number of mortgage providers have recently reshuffled their portfolios, removing their 100 per cent mortgages and put their variable rates up.
Even if you already have a mortgage, you could find that missing the odd payment on a credit card or even a catalogue could affect your renewal application and with around 300,000 fixed-rate mortgages coming to an end in December, this could affect a lot of people.
Credit cards have also been affected. Barclaycard - the UK’s biggest credit card provider recently announced a soar to £1.5 billion in bad debts and a programme of lowering existing customer’s credit limits. In some cases, credit limits have even been reduced to below the current balance on the card forcing customers to rush to reduce their debt.
David Titmuss, of The Mortgage Lender, recently warned readers of The Times that “borrowers will be ineligible for a loan if they have missed so much as one payment on a credit agreement in the past three years. This applies even if you have entered into a loan with your spouse and later become divorced or separated and your ex-partner has missed a payment.”
Although all forms of credit will be harder to come by now, there are ways of improving your chances of being approved next time you apply for a credit card, mortgage or loan.
Improve your chances
The first thing that you need to do is find out how banks will see you. Checking you credit rating is easy and you can do it for free or a small fee. Even if you don’t think you’ve missed a repayment it’s still a good idea to check your rating as it might contain mistakes, or old defaults that you’ll be able to have removed.
You can check your report at Equifax, Exprian, or CallCredit (see useful links).
If you find that you have a poor credit rating, you can work to improve it. Use one credit card and something like a mobile phone contract - without ever missing any payments - to prove that you’re now a reliable borrower.
Make sure that you set up direct debits for all your payments so that there’s no chance of forgetting or missing any. The only issue with this is that you’ll have to make sure that you’ve always got enough in your current account to cover the payments - it’s a good idea to have an agreed overdraft just in case of emergencies.
Applying for numerous credit cards and loans at the same time gives the impression that you’re desperate for money - and that you’ll be a bad bet.
Think carefully about each application you make and consider talking to your bank in branch where you’ll be able to explain any extenuating circumstances.
Deal with your debt
If you have outstanding debts make sure that you do your best to repay them as quickly and as reliably as possible. If you’re struggling to keep up with repayments get in touch with your creditors and explain the situation - they might be willing to renegotiate your repayment plan.
If you already have money problems you should resist taking out any more credit, and if you have savings as well as debt you should really use this money to clear outstanding balances. This will save you money on interest as well as helping your credit rating.
Get professional help
Having an imperfect credit rating doesn’t necessarily mean that you’ll automatically be turned down for credit - it might just mean that you’ll have to use a broker or financial advisor to help clinch you deal. And you may well have to settle for a less competitive interest rate too.
Find the right deal
Now that you know how to optimise your credit approval rate, make sure that you shop around for the right deal. The Bank of England is expected to lower the base rate in either October or November which might push down the interest rate on mortgages, credit cards and loans - but don’t just count on this. The current credit crunch has to do with more than just the base rate so the best way to get a good deal is to shop around.
Compare products and look at more than just the headline rates. You should always read the terms and conditions of any financial agreement - especially since there are usually a few clauses that can affect your interest rate.
