The New Credit Climate
The global credit crunch has put the squeeze on credit, and it means that anyone with a less than perfect credit record should steal themselves to pay more for any new credit or loan facility. As an existing borrower you could also find your existing lender cracking down on terms and conditions.
The root cause has been the sub-prime crisis, starting in the US and still claiming high profile victims, such as Citigroup boss Charles Prince who resigned at the weekend. However, there are other factors involved in the clampdown. In January next year the European law Basel II comes into force, requiring lenders to have reserves linked to the rating of their loans. It means that overdrafts and unsecured loans will cost them more than currently, and they will have to cover overdraft facilities even if they’re not being used. This is causing banks to review their overdraft facilities.
With pressure continuing to come from the Government on banks to end irresponsible lending, the banks have tightened their lending criteria. Barclaycard spokesman Andrew Bond, said: "In 2006 we rejected half of all new applicants. More recently that figure has crept up to 55%. In addition, during the past 22 months, we have been reviewing and reducing the credit limits on 500,000 credit cards. We are ensuring that our lending is appropriate for the customer based on their indebtedness, both to ourselves and elsewhere.”
How are the different areas of credit working in the new climate?
Most unsecured loan providers have increased interest rates. The real shock came recently when one of the world’s largest financial institutions, GE, decided to stop offering new loans in Britain. All lenders are looking closely at new applications. Most loans are risk rated, so if you have a poor credit rating you will have to pay a higher interest rate.
Credit card deals have gradually disappeared, and any that are still out there apply only to people with excellent credit histories. If you have a weak credit history you will have to pay higher interest rates, and may be subjected to an annual management fee. Balance transfer fees have also been creeping up and most are now around 3%.
The story on mortgages has been well documented. Interest rate are up, fees are up, and approvals are down. It is harder than ever to get a decent mortgage deal, and at a time when more and more people are coming off cheap fixed rate deals from a couple of years ago.
Consumer debt has been rising, but there is an increase in the number of people defaulting on their mortgages. Expert advice actually says that if you are heading for a problem, then you should sell up before your house gets repossessed, and switch to renting. If at all possible you should avoid missing mortgage repayments as this will impair your credit rating and make it harder to remortgage.
You can check your credit record through the main agencies, Experian and Equifax. It is important to make sure your record is accurate, and make sure you keep it good. If you have any arrears, pay them off as soon as possible.
Published on November 9, 2007
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