How to survive the squeeze on credit
The Financial Conduct Authority is clamping down on firms lending to people who are already struggling with debt.
This means credit card and loans companies are getting tougher and meaner on who they will lend to, and at what rates they charge.
All credit card firms have already drastically reduced the terms on 0% card deals, with 24 months now the longest term for balance transfers, down from 36 months last year, and over 40 in previous years.
And they are looking more closely at affordability issues – such as if an applicant’s debt to income and expenditure ratio is too high – and that means fewer people will have access to credit.
Sarah Megginson, business development manager at credit data firm ClearScore, said: “With the current economic uncertainty, lenders are tightening their credit policies. We’ve already seen changes over the past few months in the promotional offers available to consumers, such as credit card 0% balance transfers, interest-free purchase cards and cashback.
“Over the last year credit card providers have reduced their interest-free balance transfer offers from 36 months to 20, and this is expected to continue.”
It’s more important than ever that you try to manage your finances well and tackle outstanding debt so you don’t end up being declined credit or being hit with the highest rates of interest.
For the best chance of being approved for credit – on the best terms – here are some helpful tips from ClearScore:
Don’t use more than 30% of your credit card limit
To achieve the best credit score it’s best not to use too much of your credit limit on credit cards. Try to stick to less than 30% of your limit to show lenders you can manage credit sensibly.
Understand your debt-to-income ratio
Lenders will check your existing debt (excluding mortgage) to income ratio when assessing new credit applications.
To work yours out: it’s your total debt repayments divided by your net monthly income. For example, if you have debt repayments totalling £100, and your monthly income (after tax) is £1,000, your debt-to-income ratio is 10%. You need to keep this ratio below 30% to show you can manage short-term debt effectively.
Pay down debt
Before applying for any new credit, try to pay down as much of your existing debt as you can.
If you have savings, it’s worth using them to pay off debt.
But don’t forget to keep a financial safety net for when an unexpected bill crops up, such as a car or central heating boiler repair.
Don’t miss payments
Ensure you make at least the minimum payment on any credit card balances – on time, every month. Missed payments will damage your credit score and indicate to potential lenders you can’t manage debt. Better still, pay off more than the minimum repayment, as much as you can afford each month, so you get the debt cleared faster and cheaper.
Set up a standing order for an amount you can afford each month, so you don’t ever miss a payment and to ensure you are chipping away at the debt rather than just paying the interest.