MANAGING THE CREDIT CRUNCH
By Credit Expert
Saturday/Sunday, May 3-4, 2008.
With credit becoming harder to get and more expensive to repay, the idea of staying loyal to the lenders who already supply you with cards, loans and mortgages can seem absurd. If there are better deals out there, why not go for them?
But before you launch a quest for the best credit, you need to know how being a credit tart can damage your finances – and leave you with more problems than you had when you started.
Danger: Applying for credit at random
You might think it’s quicker and easier to put in multiple applications for credit. That way, you’ll see what you qualify for and can compare real-life deals, instead of spending time on research.
Unfortunately, there are no short cuts and you will waste a lot of time and effort and might even cause yourself problems in the future.
Unless you have checked your credit report recently and have a good handle on your financial affairs a bit of research can save you a lot of time and effort down the line.
It’s better to check out personal finance and price comparison web sites, the personal finance pages of the papers and specialist magazines before you make any enquiries. It is, of course, sensible to shop around to find the best product and price you can but you do not need to apply for anything until you are sure you actually want to go for it. When you do approach a lender, be sure to make it clear that you only want a price quotation until you are sure it is the right deal for you.
Multiple applications for credit can damage your ability to get other deals because as soon as a lender agrees to offer you a loan that offer remains open for a period of time afterwards. So, even if you do not decide to go ahead the availability of that credit could be taken into account when other lenders look at the amount of debt you already have.
There is also a lot of hype written about search footprints. It is true that making large numbers of applications for credit within a short period of time could be taken as a sign that you are high risk. That is because you might be doing that because other lenders have already turned you down, or you might be a fraudster.
Usually lots of searches should only make a difference if you are already borderline but why take that risk? Until you really need to know if the lender will offer you the loan it is best to just ask for a quotation which will not leave a shared footprint on your credit report.
Danger: Shifting from credit card to credit card
Interest-free periods on balance transfers and zero per cent on new purchases for a limited period can offer a respite if you’re hard-pressed for money but usually there’s no such thing as a free lunch – or a risk-free credit deal.
Watch out for fees for balance transfers – somewhere between two and five per cent is normal. You should also read the small print carefully. Any repayments you do make will almost certainly come off new spending first, which might leave the debt you transferred to mount up even more rapidly.
However, if you do decide to transfer, and sometimes it might be best for you to do this, make sure you close the old card down. If you don’t again that will count in the total of credit available and may be open to the risk of fraud if you do not keep and eye on that account. You might also be tempted to use it again as well and end up with even more debt!
Danger: Forgetting when an interest-free period comes to an end
Many retailers offer a year or more interest-free on major purchases, such as furniture and white goods. Take advantage of these offers but always remember that you eventually have to repay what you owe or you could end up racking up massive interest – 30 per cent or more is common.
During the interest-free or low-interest period, aim to save as much as possible of the total you owe. Put it into a high interest ISA and you could even end up making a profit on the deal.
If you can’t put aside enough to wipe out the debt when it becomes due, knock off as much as you can when the repayment freeze ends and take out a cheaper loan to repay the rest. You could easily halve the interest repayments this way and clear your debt more quickly.
Danger: Remortgaging or extending a loan
This can be a way out of cash-flow problems but, like all credit deals, it can have a downside. In this case, it’s simple – although you have liberated some cash and negotiated cheaper monthly repayments, you’ll be paying off your borrowings for much longer. In other words, you’re swapping a short-term benefit for years more debt, which will, inevitably, cost you more in the long term.
If you think this is a good way out, be sure to compare deals and look for one that does not carry stiff early repayment penalties, so that you can increase your repayments when your financial situation eases or take advantage of a windfall, such as an inheritance, to pay off the loan totally.
Getting it right
Your first port of call when you want to get a new credit deal is your credit report. This is the history of your credit commitments, such as loans, cards and mortgages.
It gives you the bigger picture of your overall borrowings and how well you are managing them, so you can more easily see whether you can afford more credit or whether you need to tighten your belt and repay more of what you already owe.
You can see your Experian credit report for free with a 30-day trial of CreditExpert. You can also do this with Equifax, My Call Credit and Check My File.
Please e-mail comments to firstname.lastname@example.org