When Your Credit Rate Is Poor You Will Pay More In Interest Rates
Do the banks know something we don't? The multi billion pound profits announced by all the major banks this week follow a sustained price war in many of their key markets - particularly the unsecured loan business, where interest rates are at an all-time low.
The trick that squares this circle is that only a few borrowers pay the lowest rates. Does a loan costing 6 per cent sound too good to be true? Unless you have a perfect credit rating, it almost certainly is. Save & Spend research reveals that four out of five loans on offer today are priced according to borrowers' personal credit histories - consumers with a bad credit report could end up paying 13 per cent or more.
Take the current best three buys listed by market analyst Moneyfacts: Moneyback Bank (5.6 per cent on a £10,000 loan, over five years), GE Money (5.7 per cent) and Northern Rock (5.7 per cent). In each case the headline interest rate is subject to credit rating. Most of the big banks - including Barclays, HSBC, Halifax and Lloyds TSB - offer headline rates that vary according to personal history.
Banking has gone the same way as insurance - what you pay is related to the banks' view of the risk you represent. Two years ago, 56 per cent of lenders used personalised lending rates - today that figure is 81 per cent, according to calculations made for The Independent by the price comparison service uSwitch.
Not only does this illustrate the importance for borrowers of looking after their credit status (see right), it also produces a Catch-22. Personalised interest rates mean there are real benefits from comparing rates available. But the process of seeking out and comparing interest rates can damage your credit rating, reducing your chances of being offered the best deals. Lenders assume a history of loans applied for but not taken up is an indicator of bad risk - new applications are then more likely to be rejected.
"You go into the branches of certain banks that advertise loans and you sit down and provide all your details - and it is only then that you will be told what you would actually get," says Cristina Rebollo, a spokeswoman for uSwitch. "By that time you have a 'footprint' on your credit score which means you can't shop around."
Not only do borrowers face higher rates than advertised, but lenders are also becoming more likely to reject applications. "Lenders are getting tough with credit - our research shows 3.5 million applications rejected over the past 12 months," says Sean Gardner, chief executive of analyst MoneyExpert.com.
Some online intermediaries - including MoneyExpert.com and MoneySupermarket.com - have launched web-based calculators to assist consumers assess their likely credit status, and identify the most competitive products available.
But the calculated credit rating is based on information provided by the individual borrower, who may omit, or be unaware of, information held by an agency. An agency's credit report could be significantly different.
Alexander Cowen Wright, a spokesman for Moneysupermarket.com, acknowledges the weakness. "It's a complex field, that we are trying to simplify," he says. "But we do give guidance on what consumers are more likely to be accepted for, though this is not guaranteed."
As he says, this is not necessarily just about providing lenders with people with the best credit record - it may be those who fit in other ways lenders' market positioning and preferred customer profile: "There are certain drives from lenders from time to time to attract a different type of customer and even those with a good credit rating might not fit."
Using the online credit calculators is helpful, but it is safer to check the actual credit status with one of the agencies themselves. Then the shopping around can begin in earnest - but try to make sure you know what you will be offered before you formally apply for the loan.
How to get the best possible credit rating
* Make sure you are on the electoral register.
* Check your credit report with at least one of the three main agencies: Experian (0870 241 6212), Equifax (0845 600 1772) and Call Credit (0870 060 1414). Individuals can obtain copies of their personal credit records for £2. Credit reports can be obtained online from www.moneysupermarket.com and www.moneyexpert.com.
* Challenge any information held by an agency that you believe is wrong or misleading, requesting that it is deleted or that your short note of explanation is inserted.
* If you are shopping around for the best loan or mortgage, demand a quotation search from the lender - not a loan offer. A potential lender seeing a 'footprint' of a string of loan requests is likely to assume the worst.
* Protect yourself against identity theft by looking after, or carefully destroying, paperwork, including old letters with your address.
* Pay your bills on time.
* Set up a direct debit to ensure you meet the minimum repayment on your credit card each month - even if the statement gets lost in the post.
* Don't ignore debts - if you have problems, reach agreement on making staged repayments rather than going into default.
The Independant
August 5th, 2005
http://myvesta.org.uk
The trick that squares this circle is that only a few borrowers pay the lowest rates. Does a loan costing 6 per cent sound too good to be true? Unless you have a perfect credit rating, it almost certainly is. Save & Spend research reveals that four out of five loans on offer today are priced according to borrowers' personal credit histories - consumers with a bad credit report could end up paying 13 per cent or more.
Take the current best three buys listed by market analyst Moneyfacts: Moneyback Bank (5.6 per cent on a £10,000 loan, over five years), GE Money (5.7 per cent) and Northern Rock (5.7 per cent). In each case the headline interest rate is subject to credit rating. Most of the big banks - including Barclays, HSBC, Halifax and Lloyds TSB - offer headline rates that vary according to personal history.
Banking has gone the same way as insurance - what you pay is related to the banks' view of the risk you represent. Two years ago, 56 per cent of lenders used personalised lending rates - today that figure is 81 per cent, according to calculations made for The Independent by the price comparison service uSwitch.
Not only does this illustrate the importance for borrowers of looking after their credit status (see right), it also produces a Catch-22. Personalised interest rates mean there are real benefits from comparing rates available. But the process of seeking out and comparing interest rates can damage your credit rating, reducing your chances of being offered the best deals. Lenders assume a history of loans applied for but not taken up is an indicator of bad risk - new applications are then more likely to be rejected.
"You go into the branches of certain banks that advertise loans and you sit down and provide all your details - and it is only then that you will be told what you would actually get," says Cristina Rebollo, a spokeswoman for uSwitch. "By that time you have a 'footprint' on your credit score which means you can't shop around."
Not only do borrowers face higher rates than advertised, but lenders are also becoming more likely to reject applications. "Lenders are getting tough with credit - our research shows 3.5 million applications rejected over the past 12 months," says Sean Gardner, chief executive of analyst MoneyExpert.com.
Some online intermediaries - including MoneyExpert.com and MoneySupermarket.com - have launched web-based calculators to assist consumers assess their likely credit status, and identify the most competitive products available.
But the calculated credit rating is based on information provided by the individual borrower, who may omit, or be unaware of, information held by an agency. An agency's credit report could be significantly different.
Alexander Cowen Wright, a spokesman for Moneysupermarket.com, acknowledges the weakness. "It's a complex field, that we are trying to simplify," he says. "But we do give guidance on what consumers are more likely to be accepted for, though this is not guaranteed."
As he says, this is not necessarily just about providing lenders with people with the best credit record - it may be those who fit in other ways lenders' market positioning and preferred customer profile: "There are certain drives from lenders from time to time to attract a different type of customer and even those with a good credit rating might not fit."
Using the online credit calculators is helpful, but it is safer to check the actual credit status with one of the agencies themselves. Then the shopping around can begin in earnest - but try to make sure you know what you will be offered before you formally apply for the loan.
How to get the best possible credit rating
* Make sure you are on the electoral register.
* Check your credit report with at least one of the three main agencies: Experian (0870 241 6212), Equifax (0845 600 1772) and Call Credit (0870 060 1414). Individuals can obtain copies of their personal credit records for £2. Credit reports can be obtained online from www.moneysupermarket.com and www.moneyexpert.com.
* Challenge any information held by an agency that you believe is wrong or misleading, requesting that it is deleted or that your short note of explanation is inserted.
* If you are shopping around for the best loan or mortgage, demand a quotation search from the lender - not a loan offer. A potential lender seeing a 'footprint' of a string of loan requests is likely to assume the worst.
* Protect yourself against identity theft by looking after, or carefully destroying, paperwork, including old letters with your address.
* Pay your bills on time.
* Set up a direct debit to ensure you meet the minimum repayment on your credit card each month - even if the statement gets lost in the post.
* Don't ignore debts - if you have problems, reach agreement on making staged repayments rather than going into default.
The Independant
August 5th, 2005
http://myvesta.org.uk
posted by Your Friends @ Myvesta.org.uk at
8/05/2006 09:00:00 pm
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