The Credit Crunch. Words that have inspired a thousand scary newspaper headlines. Words that strike fear into the heart of every borrower. Words that make it easy for the unscrupulous to prey on the innocent. But what are the myths and truths about getting and using a credit card in the current recession?
Myth 1: You need to take out Payment Protection Insurance on your credit card
Who pushes this myth: Many lenders sell the insurance so that the borrower is protected if they are made redundant or suffer long-term illness.
The Truth: Many of these insurance schemes are overpriced and have conditions in small print that prevent people from making a valid claim. The worst are the single-premium insurances, as the entire amount of the premium is added to the debt and interest is charged on it. The regulator, the Financial Services Authority (FSA) has written to all providers of the single-premium insurance and asked them to withdraw the product no later than 29th May 2009. The FSA can’t actually ban the product, but they can impose fines for mis-selling and flag the issue to members of the public.
Not all PPI plans are bad - only the ones where you have been overcharged or where you have been miss-sold the product. Therefore do shop around and compare quotes, you might be able to get a standalone policy that is much cheaper. Check the terms and conditions. For instance how many times a year are you allowed to claim? You might lose your job more than once in the current climate but the policy may only allow you to claim once in a calender year. Check whether they add the premiums to the debt and whether they charge interest on them. If it turns out that the premiums are prohibitively expensive, but you are worried about the prospects of your job, then consider reducing your risks by starting to pay down the debt now, while you still have an income.
If you already have existing PPI, you are usually able to cancel and switch (check the terms and conditions). If you feel you have been mis-sold a policy, it might be possible to get your money back. You need to be able to prove that the policy sold to you was inappropriate for your circumstances - for instance these policies do not pay out to people who have existing medical conditions at the time they took the policy out. If this was not pointed out to you and you went ahead and purchased despite being ineligible to claim, you have a case for mis-selling. The policies also treat self-employed people differently from employed persons - was this pointed out to you if you were self-employed? Do visit the FSA’s website for advice on how to claim for mis-selling. Claims for mis-selling can only go back six years.
Myth 2: You can’t get a credit card without a good credit score
Who pushes the myth: Mainly the press, who lazily borrow from American articles on credit and debt
The Truth: Unlike in the USA, there is no standardized credit scoring system in the UK. Of course all lenders will get a credit report on you from Experian or Equifax, but the reports only tell them what debt you have outstanding, what your credit limits are, whether you have defaulted or gone into arrears, and county court judgements and bankruptcies. Each lender will apply the information they receive differently, according to their internal rules, and they will also add into the picture other information that they have gleaned about you from their own experience of dealing with you.
This means that if you have a long and satisfactory relationship with a particular bank, they will give more weight to you than a lender who has never dealt with you before. For instance, if you have a current account with them with an authorised overdraft that you use but never go into unauthorised territory, you are a profitable customer for them. They don’t like people who stray into unauthorised overdraft territory (too unreliable), they don’t like people with defaults and arrears on any debt, they don’t like people who don’t pay their bills on time and they are wary of people who have too much credit.
Note that from 1st December 2008, MBNA, Barclaycard, Capital One, GE Money, and HBOS and MBNA have now got together to share additional information about customers such as whether you have a 0% interest free deal, when and by how much credit limits were raised, how much you pay each month (just the minimum payment, the full balance or something inbetween). They are trying to weed out the “rate tarts” who move from one 0% balance transfer promotional deal to another (and who are unprofitable for the lenders). Therefore take care if you already have a credit card with one of these companies and are applying for a card with another.
Myth 3: If I have substantial savings the credit card lender will see I’m a good risk and grant me a credit card
Who pushes this myth: This is conventional wisdom, based on the not unreasonable idea that people with savings by definition are unlikely to default on debt as they have the means to clear it.
The Truth: Lenders have no way at all of knowing what savings you have and with whom. It doesn’t show up on any credit report, and due to data protection legislation teh organisations you have savings with can’t disclose any details about your finances to third parties. It’s possible that if you are applying for a credit card from a bank you have a savings account with, they should be able to see they amount you have saved (but it depends on the information sharing rules between departments)
