Wed Mar 13, 2013, 1:00 am | 1 Comment
The recent downturn in the economy has led to a collapse in personal lending as banks have effectively put up the shutters. After years of ever increasing loans banks have been forced by legislation to consider their own funding reserves when making lending decisions.
This new level of responsibility has led to more stringent lending criteria being applied and the result is that fewer people qualify for borrowing and the amounts that can be borrowed have also declined.
This does not mean that credit is a thing of the past for consumers, low base rates have meant that margins on credit card debt have improved for lenders and as long as the bad debt rates remain under control, this is an area of lending that remains strong.
Interest rates are sufficiently high that bad debts issues can be factored into the pricing yet there are some great deals available that offer extended periods of low or zero rate credit.
Zero rate offers widely available
Many finance providers offer an extended period of zero per cent finance either for new purchases or on balance transfers. It is important to note the details of any introductory offer because it may be the case that a combination of the two transactions already mentioned would cause the interest rate to revert to the standard rate.
It is possible to obtain balance transfer rates of zero per cent for up to two years making it possible to successfully hedge against debt by investing to earn a strong rate of return for two years before the debt incurred has to be repaid.
Never pay late
If a low rate offer is offered it is critical that all minimum payments are met on time as failure to do this may lead to the interest rate applicable to the card reverting to the standard rate.
This is in addition to a small late payment charge and a negative mark on an individual credit profile maintained by credit reference agencies.
Negatives can stay on a record for many months and an accumulation of negative points on a credit reference report can lead to problems in obtaining mortgage borrowing even though the late payment may have only been one day overdue and a relatively small amount.
Conversely holding some credit card debt and repaying on time is a positive step towards repairing a poor credit record.
Consider The Approach To Credit
If credit cards are the solution to a debt problem then it is important to consider options carefully. Another aspect of behaviour that is regarded as a negative by the credit industry is to make multiple applications for credit.
This can be viewed as a sign of desperation and a scattergun approach to debt applications is likely to lead to more rejection from a wider pool of lenders.
It is vital that consumers work out their borrowing needs and make single applications that appear to be relevant to current circumstances.
This is likely to increase the chances of a successful application but if an application is unsuccessful only one instance of this will go on record and this should not have too great an effect on any subsequent applications.
Shuffle The Cards
It may be the case that an individual has significant credit card borrowings on one particular card but does not have sufficient funds to fully clear down the balance.
It may be beneficial to move the debt from one card to another if it is possible to take advantage of a promotional offer relating to balance transfers. Market conditions often make it efficient to move debt around to take advantage of low rate offers on balance transfers.
One a balance is cleared the lender may choose to launch another promotional offer on the card making it possible to reduce exposure to interest rates by simply clearing down a card and moving it to another low rate card.
This may create an opportunity to move other debt onto the card that has been cleared and the process, known as shuffling, can lead to significant savings in interest payments.
What To Do If Credit Score Is Poor
All credit applications are assessed against the credit score of an individual. If that score is low an application for credit may be rejected, particularly if the lender is mainstream.
Some credit cards are specifically aimed at people with poor credit ratings but often carry a higher rate of interest or offer a relatively low credit limit.
Whilst credit card lending has jumped in recent years there are other forms of finance available especially for purchases that are for relatively large assets such as vehicles.
As a vehicle can be used as security on a loan it is possible to obtain car credit for bad credit.
There are willing lenders in the market that factor in poor credit scores safe in the knowledge that a vehicle can be used as security for a loan.
Many lenders of motor finance have strong links to the motor industry and their positive approach to lending is actually boosting activity in the motor vehicle industry.
Without lending, the market would grind to a halt but by facilitating trade the financial markets are providing an economic stimulus that is available to few industries.
Remember The Key Steps
When considering credit applications it is important to remember that a strategy of fewer specific applications is necessary to achieve lending targets.
It may be possible to take advantage of special offers by shuffling credit card debt to reduce overall interest rate exposure. Even if an individual has a poor credit rating there is usually a specific solution to a debt problem, it just may not be provided by a mainstream lender and may be slightly more expensive than finance provided to an individual with a lower risk credit profile.
The financial markets are sufficiently segmented to offer a product that suits a diverse range of circumstances. It is important to recognise this and seek a financial solution that is appropriate for a specific situation.
The greatest lesson that an individual can learn is that anything is possible in the world of finance and lenders are not all uniform. Perseverance in the market and good research into a range of possibilities will lead to the fulfillment of dreams, an acceptance of the status quo is likely to lead to disappointment.
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