These days, with credit becoming harder to get and more expensive to repay, the idea of staying loyal to the lenders who already supply you with credit cards, loans and mortgages can seem absurd; after all if there are better deals out there, why not go for them?
But before you launch on an epic quest for the best available credit, you need to know how being a credit tart* can damage your finances; and leave you with more problems than you had when you started!
(* Credit tart refers to those of us who move a debt onto an interest free credit card, move it again when the introductory offer expires and never pay any interest).
- Danger 1: Applying for credit at random
You might think it's better to submit multiple applications for credit as that way you'll see what you qualify for and can compare real-life deals, instead of spending time on doing research.
Unfortunately, there are no short cuts and you will end up with "footprints" all over your credit history. These are the records of searches made by lenders in response to a full application and they stay on your record for the next year. When other lenders see them they may think you are desperate for money or even that a fraud is being planned; and your credit rating will suffer.
It's better to check out personal finance and price comparison websites, the personal finance pages of the papers and specialist magazines before you make any enquiries. When you do approach a lender, be sure to make it clear that you only want a quotation which will not leave a footprint on your credit report!
Interest-free periods on balance transfers and 0% on new purchases for a limited period can offer a respite if you're hard-pressed for money
but there's no such thing as a free lunch...or a risk-free credit deal!.
Watch out for fees for balance transfers; somewhere between 2% and 5 % is normal. You should also read the small print carefully. Any repayments you do make will almost certainly come off new spending first; leaving the debt you transferred to mount up even more rapidly.
Instead, you should use the interest-free period to repay as much of your outstanding balance as possible; that way you really will save money.
- Danger 3: Forgetting when an interest-free period comes to an end
Many retailers offer a year or more interest-free on major purchases, such as furniture and white goods. Take advantage of these offers but always remember that you eventually have to repay what you owe or you could end up racking up massive interest (
30% or more is common!).
The same warning applies to loans taken out as special offers. For example banks often run loan sales to coincide with the High Street sales after Christmas and in the summer. The headline interest rate may be 2% off but it will almost certainly rise after an introductory period.
During the interest-free or low-interest period, aim to save as much as possible of the total you owe. Put it into a high interest ISA and you could even end up making a profit on the deal (which is nice!)
If you can't put aside enough to wipe out the debt when it becomes due, knock off as much as you can when the repayment freeze ends and take out a cheaper loan to repay the rest. You could easily halve the interest repayments this way and clear your debt more quickly.
Danger 4: Remortgaging or extending a loan
This can be a way out of cash-flow problems but, like all credit deals, it can have a downside.
In this case, it's simple; although you have liberated some cash and negotiated cheaper monthly repayments, you'll be paying off your borrowings for much longer. In other words, you're swapping a short-term benefit for years more debt, which will, inevitably, cost you more in the long term.
If you think this is a good way out, be sure to compare deals and look for one that does not carry stiff early repayment penalties, so that you can increase your repayments when your financial situation eases or take advantage of a windfall, such as an inheritance, to pay off the loan totally.
- How you can get it right!
Your first port of call when you want to get a new credit deal is your
credit report. This is the history of your credit commitments, such as
loans,
credit cards and
mortgages.
It includes your repayment history, list all the searches lenders have made in response to applications in the last 12 months and features information such as county court judgments (CCJs) against you and whether you have been bankrupt or taken out an individual voluntary agreement (IVA) over the past 6 years.
It gives you the bigger picture of your overall borrowings and how well you are managing them, so you can easily see whether you can afford more credit or whether you need to tighten your belt and repay more of what you already owe.
Because lenders check it whenever you apply to them, it is crucial that your credit report is up to date and accurately reflects your circumstances, so you should check it regularly.
Look for misunderstandings, such as full searches leaving footprints when you only wanted information, and contact the relevant lenders to sort them out.
Generally, a credit report that shows you are not over-stretched and make your repayments on time and in full helps you to get better deals, so you may decide to work on improving it before you apply for more credit.
You can see your Experian credit report for free with a 30-day trial of CreditExpert, the UK's leading online credit monitoring and identity fraud protection service.
© Experian 2008
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