Survival guide for the credit crunch


| Author: Stooz | Created: 12/10/2007 |

Britain's personal debt on cards, mortgages and loans has exceeded the entire value of the economy for the first time. Alongside this, dismal predictions that at least 8.6 million Britons will be routinely refused credit by mainstream lenders by 2011 have emerged from a report by analysts Datamonitor.

There are simple steps you can take to protect and even improve your credit status and stop yourself from being pushed over the financial edge.

It's worthwhile remembering that individual lenders assess credit applications in different ways. Some even set different criteria for different offerings. So you might find yourself rejected by one lender but welcomed by another - the key is to understand your own credit profile and find a deal right for you.

See how well you're coping

Research carried out shows that 15.4 million people in the UK cannot quantify their debt to within £100. The trend was worse among 18 to 24 year olds, with 41% of 18-24 year olds unaware of their current debt burden to within £500.

By checking your credit report, you can see the personal history of the credit you have taken out, such as loans, cards and mortgages, plus your repayment record, whether you have court judgments against you - and more. It offers a snapshot of what you owe and how well you are managing. This can help you to work out how much you need to spend on essentials and how much you have leftover. But don't assume you can blow everything else - always keep something aside for emergencies. It can help to set up direct debits for regular bills and you may get a discount, too. This also ensures you are always on top of your repayments as it's crucial to pay what you owe on time or your credit status will be affected.

Know what lenders look for

Lenders take the information in your credit report and your application form, allocate relevant items a value and use their own unique formula to calculate your credit score, also known as a credit rating. This is a number that represents the risk that you will not repay what you owe. Generally, the higher your score, the easier you'll find it to borrow and the better interest rates you'll be offered.

Talk to your lenders

It's much better to warn them that interest rate rises could cause you problems than to hang on in there and miss a few payments. Details of missed or late payments will be held on your credit report for up to three years. If you are struggling to make ends meet, lenders will work with you to find a repayment schedule that you can afford, rather than have you default on your debt.

Build a better credit history

There are many ways you may improve your credit report - and your chances of getting the deals you want. For example, you could pay off one credit card entirely or roll up several debts into a single, more cost-effective loan. One simple step is to register to vote.

  • Make sure you are registered to vote as lenders look up the electoral register whenever you apply, to check that you are who you say you are and live where you say you do. If you don't appear at your current address, they could mark your credit score down or even refuse your application outright.
  • Check your credit report carefully to be certain it is up to date and accurately reflects your circumstances - even a simple clerical error could damage your credit rating. If you disagree with anything, contact the source of the information - such as a lender or court - and ask them to change it. Be prepared to provide proof.
  • You may also be able to add an explanation to an individual entry on your credit report, explaining the circumstances that led to a problem.

Don't go bankrupt

There is no quick fix for debt. A bankruptcy or its cousin, the Individual Voluntary Arrangement, may seem an attractive escape route but they will taint your credit history for many years. If you think insolvency might be a sensible way of dealing with your debts, make sure you seek expert, impartial advice first. Information about both of these options stays on your credit report for at least six years, even after they've been discharged or completed. Lenders are less likely to grant you credit as they will view you as a higher risk.

Get expert advice

If you're worried about how to cope, get free, expert advice from one of these organisations:

Finally use our 8-step checklist to help you weather the credit storm

  1. Shop around for the best prices on all your financial products, such as loans, mortgages, credit cards, mobile phones, insurance policies and utilities.
  2. Consider managing your accounts online and paying by direct debt as this will often save you money.
  3. If you are struggling with your mortgage payments, speak to your mortgage lender as soon as possible. You might also consider re-mortgaging if there are better deals available.
  4. Create a budget for yourself and stick to it, but be realistic!
  5. Pay your bills on time, while ensuring you do not go over your overdraft limit.
  6. Make the most of the high interest rates by making sure any regular savings are earning the best possible return.
  7. Finally check your credit report for free with one of the various credit reporting agencies

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