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Five things you must do before applying for credit

Tips for applying for a credit card or loan

If you pay off your full balance every month, you can effectively borrow for nothing

If you pay off your full balance every month, you can effectively borrow for nothing

January is traditionally a time when many of us make financial New Year’s resolutions. Transferring borrowings from one account to another in order cut interest costs is a popular activity at this time of year – as is hunting down the best deal on any new borrowing that might be needed, perhaps to finance home improvements or the purchase of a new car.

But before you apply for any form of credit in 2011, make sure you follow these five tips. Otherwise, you could end up with an uncompetitive deal, without the credit you need – or might even negatively affect your credit rating.

1. Check your credit file

Before any lender agrees to offer you credit, it will access the information that is held on you by a credit reference agency (CRA). Not all lenders use the same CRA, and not all CRAs hold identical data on individuals – but whichever ‘version’ of your credit file your chosen credit card or loan provider sees, the information it contains will affect whether or not your application to borrow is successful.

Knowing what’s on your credit file is important if you’re looking to borrow, because inconsistencies and errors – which in many cases won’t be your fault – could discourage a lender from accepting you as a customer. Not being on the electoral register, having a ‘financial association’ with an ex-partner or having too much existing, available credit could also put a lender off allowing you to borrow.

For more information on how to check your credit file and how to improve your credit rating, read the Which? advice guide Your credit report explained. Also, be aware that if you apply for credit and are rejected, you’re likely to find it even harder to borrow next time you try – so it’s important to assess the likelihood that you’ll be accepted for a market-leading deal before trying to obtain one.

2. Consider your needs carefully

The market is saturated with credit cards and loans of all different kinds – so before you apply for one, make sure it’s the right choice for you.

If you’re looking to cut the cost of existing borrowings, a 0% balance transfer or long term, low rate credit card might be the best choice for you. Alternatively, if your debts are sizeable, a competitive personal loan might offer you a more structured way to repay what you owe – although this is likely to cost you more.

On the other hand, if you’re looking to borrow for a new purchase, you might want to consider opting for a 0%-on-purchases credit card – particularly if you’re confident you can pay it off in full by the time the interest-free period ends.

For help with selecting the right kind of credit for you, read our guide to your loan options.

3. Shop around for the best credit card or personal loan

Opting for the first credit card or personal loan offer you come across could end up costing you, because it’s very possible your bank or building society won’t be offering the best deal on the market.

Use our online reviews of Credit cards and Personal loans to help you track down an affordable option that suits you.

In the case of personal loans, be sure to look at the total amount repayable (TAR) on any loan you look to take out, as well as the advertised interest rate. Also, remember that the longer you spread loan repayments over, the more costly your debt will be overall.

4. Check what’s already in your wallet!

Before you send off any application for a credit card – whether it’s a paper or online form you’re using – check which plastic you already have in your wallet.

Competitive credit card deals, such as Barclaycard’s market-leading 17 month balance transfer offer, are generally only available to new customers – so it pays to be sure that you won’t be disqualified from taking out a credit card before you apply for it. MBNA group, which also supplies Virgin credit cards, operates in a similar way to Barclaycard.

On the other hand, if you hold a Nectar card, you may be eligible for a Sainsbury’s loan at the preferential rate of 7.9% APR – not the typical rate of 9.9% APR extended to other customers.

Some banks also offer ‘tied’ financial products that are exclusively for existing customers, so it may be worth looking at the credit card and loan deals your current account provider has to offer. (It’s worth noting, however, that tied products do not appear on the Which? Best Rate tables because their availability is limited.)

5. Make sure you read the small print

Finally, before you sign and submit your credit application, be sure to read the small print.

Make sure you know how long any promotional period on a credit card will last, and ensure you know how much of your borrowing you will need to repay each month. If you take out a personal loan, you should also find out if you will be subject to an early repayment charge (ERC) if you decide to pay back your debt early.

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