Credit crunch: Don't get blown away by the debt storm
Borrowers face a cold snap this winter, as banks, building societies, credit card companies and other lenders clamp down under the onslaught of the credit crunch.
The Bank of England held the base rate at 5.75 per cent this week, but lenders are still restricting access to credit, while at the same time pushing up the fees and charges for those who are offered debt.
Up to 3.3m prospective credit card holders have had their applications rejected in the past six months, according to research by financial comparison service MoneyExpert.com, an increase of 17 per cent compared with the previous six months.
Barclaycard, Britain's biggest credit card provider, is, for example, now rejecting 55 per cent of new applicants rather than 50 per cent before, and has reduced credit limits for half a million customers since the start of 2006.
A Barclaycard spokesman said: "We have reduced credit limits where we have seen customers becoming over-indebted, either with ourselves or with other lenders."
In general younger cardholders have been worst hit, with 15 per cent of applications by those aged between 25 and 34 turned down in the past six months, according to MoneyExpert.com. In contrast, only 3 per cent of applications from people aged between 55 and 64 were refused during the same period.
Sean Gardner, MoneyExpert.com chief executive, said: "Credit card companies have had a rough ride with bad debt, so it is no surprise that they are becoming stricter about who they will lend money to.
"Credit is undoubtedly harder to come by than it has been for a long time.
"But that is not to say that there are not good deals out there, it is just that fewer people will be able to take advantage of them now that the financial environment has become stricter."
Similarly, personal loan acceptances have declined in each of the past six months, according to price comparison site moneysupermarket.com.
Tim Moss, head of loans at moneysupermarket.com, said: "The banks deny they are getting choosy, but our findings show they are and many deserving Brits are suffering because of it.
"The trouble now is that people with near spotless credit records are finding it difficult to get a loan or only being offered one at a higher rate."
Meanwhile, banks and building societies have been pulling mortgage deals, with 40 per cent fewer loans available last month than three months previously, according to money search engine Moneyfacts.co.uk.
Julia Harris from Moneyfacts.co.uk said: "Clearly the reduction means less choice for borrowers, particularly for those with bad credit, irregular incomes, or those looking for high loan to value products.
"Lenders are taking a cautious approach, and if housing prices continue to fall or arrears begin to rise, these could be the catalyst for far worse trouble."
Borrowers keen to survive the credit crunch and benefit from the best deals still available should follow our top tips:
Those accepted for credit cards face more expensive charges, as card providers made a staggering 125 increases in fees and rates in the past two months, according to research this week by Moneyfacts.co.uk.
Mike Naylor, from price comparison site uSwitch.com, said: "Credit card customers have been bombarded with a glut of changes to fees and charges.
"Although they appear to be very small tweaks to the terms and conditions which cost individual customers a few pounds, collectively they add to an extremely lucrative source of income for credit card providers."
uSwitch.com calculates that credit card companies are set to rake in almost £460m in balance transfer fees alone. Yet with 300 credit cards on offer, it is still possible to find a good deal.
Switching a balance to an interest-free offer – while allowing for the increased fees – can help buy breathing space to start paying off your debt, without the pressure of spiralling interest payments.
Prospective borrowers approved for loans also face paying more for their money. Only four months ago, rates under 6 per cent were available, whereas now you would be hard pushed to get your hands on a rate of less than 6.9 per cent, according to Moneyfacts.co.uk.
Samantha Owens, head of personal finance at Moneyfacts.co.uk, said: "Competitive loan rates can still be found, especially if you are borrowing larger sums of money.
"But as rates continue to rise and lenders begin to withdraw from the market, it could look a very different picture in a few months' time.
"The credit crunch seems to be the final nail in the coffin, as lenders continue to raise rates but more surprisingly withdraw their products altogether.
"Leeds Building Society withdrew its low rates on small loans at the end of last week.
"This week GE Money followed suit, withdrawing its competitive rate of 6.9 per cent on loans between £7,500 and £25,000, while LV= has pulled out of the personal loan market."
More than 250,000 homeowners are set for a financial slap in the face once their two-year fixed-rate mortgage deals finish before the end of the year, according to Nationwide Building Society.
After five rate rises since August last year, borrowers on rates averaging around 4.56 per cent will see their payments soar if they move on to their lenders' standard variable rate, now typically 7.75 per cent .
A family with a £100,000 interest-only mortgage used to paying £380 a month would then be faced with finding an extra £266 a month, or £3,192 a year, as their monthly payments leap to £646.
Remortgaging to a new deal can help ease the pain, even if the new rate is still likely to be higher than your previous deal. For example, Cheshire Building Society currently offers a competitive two-year fixed-rate loan at 5.49 per cent , with a £999 arrangement fee.
David Hollingworth from mortgage brokers London & Country said: "If you are currently on a really good deal with a low rate, you could start budgeting for the increased payments now, even if you have six to nine months left.
"By setting the money aside each month you could either pay off a chunk of the mortgage at the end of your deal, or overpay on your mortgage each month, cutting both the time taken to clear your loan and the total interest paid."
As mortgage lenders withdraw from riskier lending, they have been cutting the amount they will lend relative to the value of the property.
With access to 100 per cent loan-to-value mortgages becoming more restricted, you could increase your choice of loans by saving up a deposit.
For those who have already taken out loans worth 100 per cent of the property value, Mr Hollingworth said: "At the moment, the outlook is for a very flat housing market, so you cannot rely on house price inflation alone to reduce your loan to value.
"It could be worth putting more effort into overpaying your mortgage, so that at the end of your 100 per cent deal you have built up 5 per cent to 10 per cent equity, and have a wider choice of loans at more competitive rates."
As lenders tighten their borrowing criteria, it becomes more important than ever before to maintain a squeaky clean credit rating, faced with the prospect of more expensive rates, or even being refused credit altogether.
Start by checking your credit record, to make sure that the details available to potential lenders, such as your repayment history, are correct.
Mr Moss said: "On rare occasions someone else's credit report may have been mixed up with yours, or worse still you may be the victim of identity theft.
"The three credit reference agencies, Equifax, Experian and Callcredit, can all provide a statutory credit report for around £2.
"However, these are difficult to interpret and you may be better off investing in one of their more comprehensive reports, which normally cost around £14."
Another simple step is to register to vote, so you show up on the electoral register at your current address.
Most importantly, make sure you do not run up arrears on existing debts.
When taking control of your finances, draw up a budget and make sure you meet your most important debts, followed by those with the most expensive interest rates.
Hugo Shaw, from financial advisers Bestinvest, said: "Make sure you pay off your priority debts first, such as your mortgage, since failing to do so could mean you lose the roof over your head.
"With winter approaching you will need to keep gas and electricity – there is no point buying little Johnny the expensive games console if there is no electricity to run it.
"Likewise the Christmas turkey may not taste so good if the oven has no gas."
Bills such as council tax and your television licence also need to be paid, as otherwise you could risk a jail sentence.
Once you have dealt with these debts, turn your attention to the most expensive items, typically store and credit cards, personal loans and overdrafts.
IF you are drowning in debt, it can be tempting to borrow more to get out of a hole. More than a million householders have used credit cards to pay their mortgage or rent in the past 12 months, according to a survey by housing charity Shelter.
Yet Shelter pointed out that most credit card companies charge interest at between 15 per cent and 18 per cent – nearly half as much again as even the highest mortgage interest rates charged at 11 per cent or 12 per cent for those with credit problems.
Once heavy borrowers have bought some breathing space by, for example, using an interest-free credit card offer, it is vital not to load up with more debt. Instead, cancel other existing forms of credit and do not extend your overdraft limit.
Shona Dobbie, head of Alliance Trust Research Centre, said: "UK households have been too short-sighted and lost track of financial reality.
"Consumers remain reluctant, in the face of growing evidence, to pull back from their elongated spending binge.
"Low real earnings growth, higher mortgage repayments and hefty council tax bills all suggest that households should take a much-needed reality check."
If debt problems are piling up, you need to face your financial fears rather than ignoring the issue.
David Harker, chief executive of Citizens Advice, recently reported that it is now dealing with 6,600 new debt cases every working day, so you are not alone.
However, take action before your debts spiral out of control. Housing repossessions for those unable to afford their mortgages are already set to rise by half next year, up from 30,000 in 2007 to 45,000 in 2008, according to the Council of Mortgage Lenders.
Mr Shaw said: "If you are in trouble, or think you may be heading for trouble, then the worst thing you can do is put your head in the sand."
Instead, Owen Roberts from credit reference agency Callcredit advised people who are struggling with their repayments to assess their debts, seek help from an organisation such as the Consumer Credit Counselling Service, and then contact their lenders to discuss a suitable repayment plan.
Tips: how to beat the credit crunch
# Avoid paying more than you need to for credit cards, as providers push up balance transfer fees almost fivefold in only two years.
# Watch out for higher interest on personal loans, as the cheapest rates have increased from under 6 per cent to 6.9 per cent over the last four months.
# Remortgage if you are coming to the end of a deal, to minimise the financial shock for 250,000 homeowners finishing low two year fixed-rate deals before the end of the year.
# Build up a deposit before applying for a mortgage, to maximise your choice faced with 40 per cent fewer loans than three months ago.
# Clean up your credit record, as applications for credit cards are increasingly rejected, up 17 per cent in the last six months.
# Pay off your priority debts first, such as heat and shelter, followed by the more expensive rates typically charged on credit and store cards, personal loans and overdrafts.
# Resist taking on further debt, and build up emergency savings instead.
# Do not bury your head in the sand, but seek advice and talk to your lenders.
Please post any news stories about IVAs here:
See my Blog: