Joe Public & The Credit Crunch: How We are Affected, and What We Can Do About It
Publication Date: Saturday, March 01, 2008
At the beginning of February this year, Egg gave 161,000 of its customers (approximately 7%) notice of the cancellation of their credit cards. After 35 days, although they could continue to make the minimum monthly repayments, they would no longer be able to spend on their credit cards. The reason given by Egg was that the customers targeted posed an unacceptably “high risk”. Given the ready availability of credit or 'easy money' this time last year, this belt-tightening among lenders is evidence of the increasing ways in which the credit crunch is affecting Joe Public.
At the time of writing, the results of this decision by Egg are hotly anticipated by other lenders and consumers alike. If the move pays off for Egg, then there is a good chance that other lenders may follow suit. It has been suggested by commentators that Egg, since being bought by US firm Citibank, have cancelled these credit cards not to alleviate risk, but to maximise profits. This view is supported by numerous customers with excellent credit histories having been targeted in the credit card cull. But motives aside, it is clear that lenders and banks have already started to act in a way that could affect us all as consumers. As the 161,000 cancelled credit card holders can testify.
An end to ‘loose’ credit
So in what other ways can we expect to be affected? Well, for some months it’s been considerably more difficult to secure credit in the first place. Many lenders are now said to be rejecting over 50% of loan and credit card applications. A knock-on effect of such a trend is likely to be that shopping around for the best deals on financial products will become essential. Hopping from bank to bank in pursuit of the lowest APR will be limited to those with the best credit ratings. Even then, a cynic may argue that if your credit rating is too good, then the lender will not be assured of your profitability, and you may also be rejected. The lenders would like to see a return to the days of ‘loyalty’ to one’s bank or building society (albeit that the ‘loyalty’ is somewhat enforced).
Already it is evident that some banks and building societies are promoting fewer ‘must have’ deals to attract new customers. In the same vein, it seems likely that a number of mortgage lenders will offer less competitive rates, and concentrate more on keeping current customers as opposed to attracting new ones. To this end, many homeowners may find it difficult to find a competitive remortgage deal and may thus, unavoidably, end up on their lender’s more expensive SVR (Standard Variable Rate).
Brace yourself
So if we believe that a number of customers are likely to find borrowing more expensive in future, what can be done about it? Firstly, it’s an idea to check your credit rating to see what options might be available to you. You can do this for free by signing up to the 30-day trial at the Experian website and requesting your credit status. There are other credit checking companies, but in the UK Experian are the most widely used by lenders.
Bear in mind that since becoming more cautious, lenders are likely to turn down anything less than a good credit rating. If yours is less than good, you can look to improve it in a number of ways. For example, if you have a few different credit cards, you could try paying one or two off completely and closing the account, as accounts listed as settled will earn you brownie points in credit terms.
Choose products carefully
It could be advantageous to switch outstanding credit card debt to a card with 0% interest on balance transfers for a lengthy period, in order that you can pay off the capital over the time, rather than just interest. This is especially the case if the APR on your current card is likely to face a hike. There are two things to keep in mind here. The first is that you would also need to be credit checked to acquire your new 0% balance transfer card, so ensuring that you have a good credit status will still be a factor here. Secondly, if and when you do get your shiny new card, DON’T spend on it, or continue spending on the old card. In fact, chop your old card into tiny pieces and close the account straight away once the balance is transferred. Otherwise you won’t be bracing yourself for the future - you will merely be exacerbating your debt.
Also, it’s probably not too late to consolidate more expensive debts (that is, debts with the greatest APR or high monthly repayments) into a more manageable loan. Again, if your credit rating is less than excellent, then it is unlikely that you will be successful obtaining a loan with the very cheapest APR, as competition for these is likely to be the most fierce. A loan with a slightly higher APR will still be cheaper than the interest on a credit card, plus it will increase your chances of acceptance. Again, getting such a loan is not a license to continue overspending, so be careful!
And those who are looking to remortgage, do not lose heart! Although it may become increasingly difficult to find a good mortgage deal, it doesn’t mean that they won’t pop up from time to time. Keep shopping around, and be quick if any good deals come up - as a horde of bargain hunters will probably have the same idea. Good luck!
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