With bad debts rising sharply, lenders are becoming pickier when handing out cards and loans. Here's some advice on managing your debts sensibly.
It appears that lenders are getting choosier when it comes to handing out credit, thanks to an increase in bad debts. As the economy slows and the housing market cools, over-stretched consumers are finding it difficult to pay their bills. As 'easy credit' turns into 'hard debt', many borrowers are skipping credit-card and loan repayments in order to make ends meet.
Indeed, the worst-hit borrowers are choosing to become bankrupt or insolvent in order to tackle overwhelming burden of debt. In the second quarter of this year, almost 15,400 people chose bankruptcy or an Individual Voluntary Agreement as their final resort. With almost 1,200 people a week going down these routes, it's no wonder that bank debts are rocketing. Among the high-street giants, bad debts were on average a fifth (20%) higher in the first half of this year than they were in the first half of 2004.
Naturally, lenders have responded by stiffening the criteria they use when processing applications for credit. Hence, more and more applicants are being rejected as the banks become wary of 'over-lending'. Last week, Barclaycard, the UK's leading credit-card issuer, admitted that it now rejects half (50%) of all new applicants, almost 13,500 applications each month. What's more, the firm has reduced the credit limits of 83,000 cardholders in order to curb their spending.
Other major banks, such as HBOS, HSBC and Lloyds TSB have also started being tougher on new borrowers. Overall, between three and four out of ten credit applications (up to 40%) are being turned down. This could be a problem for two groups of people in particular: those with poor credit ratings, and those with good credit histories. "Huh, how can that be?" I hear you ask! Here's why:
Individuals who spend more than they earn and therefore rely on credit to fund their lifestyle will find it much harder to get credit. For many, this could be the 'tipping point' that leads to their finances collapsing. People particularly at risk in this category include borrowers who only pay minimum monthly repayments on their cards, and those whose balances rise relentlessly. These people will be turned away because lenders worry that they will struggle to repay their debts.
People with good credit histories and strong finances could also be hit. Take me, for example: I'm finding it harder to get credit these days, because I'm a cheeky 'rate tart'! Over the years, I've shifted balances between a string of 0% credit cards, in order to enjoy a series of completely interest-free loans. However, card issuers are catching on and, since they don't want to take on unprofitable customers, I find my applications being rejected. Hence, reliable borrowers are being rejected because they aren't profitable enough! Learn how to avoid paying interest on your debts in From 30% To 0% In Sixty Seconds!
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So, what's the upshot of this credit crunch, and what will be the outcome for consumers? Here are some of my thoughts:
1. It's likely that weakening household finances and rising bad debts will lead to reduced competition among card issuers. This could mean some players withdrawing attractive 0% deals and increasing rates for existing borrowers. Online lender Egg has already done this, raising its standard interest rate from 14.9% APR to 15.9% APR at the start of this month. So, if you want a nice 0% card, it may be wise to apply sooner rather than later!
2. Just as the banks are becoming more responsible in their lending, so we Brits must learn to moderate our spending and borrowing. That means spending less than we earn, boosting our disposable income, and throwing this spare cash at expensive debts. As the old saying goes, "It's not the debt which cripples you, it's the interest!" Visit our Living Below Your Means discussion board for money-saving tips.
3. Lenders charging the lowest rates will continue to cherry-pick the best customers. For example, one leading loan provider rejects seven out of ten applications in meet its legal requirement to offer two-thirds of borrowers its ultra-low 'typical APR'.
You'll find some of the UK's lowest personal loan rates in our Loans centre.
4. There's an outside chance that card issuers may raise their minimum monthly repayments in order to encourage borrowers to repay their balances faster. However, this 'payment shock' could finish off the worst-placed borrowers, and would reduce lenders' profits, so it's a long shot. Learn about the horror of low minimum repayments in The Day That Credit Cards Turned Nasty!
5. Lenders may respond to a growing number of complaints from rejected customers by making their borrowing process more transparent. For example, they may make you an 'offer in principle', rather than credit-scoring you and placing a marker to this effect on your credit record.
Finally, if you want to start cutting back, visit our Get Out of Debt centre today, where you'll find loads of advice on boosting your income, cutting your bills and dynamiting your debts!
More: Check out our range of 0% credit cards and low-cost loans.
Cliff owns shares in HBOS.
