Crack down on credit before they do

If you have anything less than a perfect credit record, be prepared to pay more for any new loan or credit facility you want to take out. As a result of the global credit crunch, you could also find your existing lenders cracking down on terms and conditions. Even those with good records could get caught up in the credit crackdown that is affecting banks, building societies, credit card companies, mortgage lenders and other financial firms. advertisement

Though a lot of the blame is being laid at the door of the US sub-prime mortgage problems, there are other pressures that are also affecting terms and conditions as well as rates. In January, a new European law comes into force called Basel II which requires lenders to have reserves linked to the risk rating of their loans. That means overdrafts and unsecured lending will effectively cost them more than at present.

They will also have to cover overdraft facilities even if they are not being used. As a result, a number of banks are reviewing overdrafts and reducing the amount available or withdrawing facilities completely. This is happening both where they are not being used and where they are constantly being used to the maximum with no indication of an eventual reduction. The Government and Parliamentary committees have for some time been putting pressure on financial organisations to end what has been seen as irresponsible lending and tighten up on who they will lend to and how much is available.

This is one of the keys to what is going on. More financial organisations are now sharing information and can more easily spot people who have debts or credit facilities with several providers. Not only will they turn down such people for new debt but will also, where possible, reduce facilities already provided. But lenders are also using the current situation as an excuse to increase profit margins.

This has been true for secured (home loans) and unsecured lending. Robin Amlot is editor of moneyextra.com, the online personal finance site run by independent financial advisers AWD. He explained: "This is why the Bank of England does not need to raise interest rates - because the lenders are effectively doing it for them. Banks are applying lending criteria more rigorously and the number of credit card promotions has fallen dramatically." Here is the situation in the main lending areas.

UNSECURED LOANS

Barclays has announced a reduction in its Barclayloan Plus product and Co-op Bank has launched a new personal loan called Your Personal Loan, which has an extremely low typical apr of 6.3pc. However, most lenders have raised rates. Mr Amlot noted: "Four months ago you could get unsecured loans for less than 6 per cent. Now you will be lucky to pay less than 6.9 per cent."

There was some surprise when Capital One recently reduced new lending but the real shock has been the decision in the past few weeks by GE - one of the world's largest financial organisations - to stop offering new loans in Britain. Existing loans are still being serviced but the company says it has no plans to start offering new unsecured loans.

Meanwhile, other lenders are scrutinising applications more closely and adjusting the rate at which they are willing to lend money. Most loans are risk rated which means the poorer your credit record, the higher the interest rate you will have to pay.

Source: www.telegraph.co.uk/