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16 Apr 2020

How to boost your borrowing chances as credit card and loan deals shrink

As it gets harder to find loans and credit cards, here's guidance on the best ways to choose and apply to a lender

The financial impact of coronavirus is increasingly being felt, with even households that had previously thought they could weather a financial shock starting to worry - and some potential borrowers are finding it harder to find loans and credit cards.

Which? research has found that some credit cards have been withdrawn, while others have seen terms restricted or costs raised. The number of loans available has reduced and lenders are toughening up policies on acceptance of new borrowers.

Would-be borrowers are also facing longer-than-usual waits to find out if they will be given credit.

Here we look at how COVID-19 is squeezing credit availability for newcomers, and what you can do to improve your chances of being able to borrow.

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Lenders tighten borrowing restrictions

Loan and credit marketplace ClearScore says the choice of credit products points has shrunk by over a half as lenders withdraw products or tighten lending restrictions because of the economic fallout of coronavirus.

Among would-be borrowers, ClearScore claims the most hard-hit are the self-employed and part-time workers, some of whom are key workers. It suggests lenders are unfairly shunning self-employed and part-timers who could actually afford to borrow.

Between 15 March and 7 April , the average number of loans or credit cards prospective borrowers could choose from on ClearScore's marketplace dropped by an average of 59% (ClearScore only shows users credit products for which they are eligible).

Although the Financial Conduct Authority (FCA) has instructed banks and credit providers to assist existing borrowers, new borrowing is being restricted.

Providers have tightened lending criteria amid concerns about their own finances, with growing fears that the epidemic and its effects could last much longer than had originally been hoped.

Even the once-financially stable feel at risk

As the effects of the pandemic have spread, even those who had previously expressed confidence that they could withstand a financial shock have become concerned.

Three in five households had already seen their income reduced by COVID-19, according to a survey conducted on 23-24 March by TransUnion, one of the UK's three main credit reference agencies.

This marks a dramatic reversal since November, when TransUnion found the same numbers had felt they would be insulated from the effects of a sudden financial upset.

In another TransUnion survey conducted on 3 April, 60% said they'd be unable to pay their bills within the next four weeks.

These fears are spread across all income levels, ages, regions and ethnicities.

Even among those whose household incomes had not yet been impacted, nearly three in 10 expected to be affected negatively by the economic impact of coronavirus.

Credit cards withdrawn and terms reduced

Which? has found that seven credit cards have been withdrawn from the market in recent weeks. Elsewhere, minimum repayments have been raised, terms shortened and eligibility tightened.

Credit card providerWhat's changed?
Bank of ScotlandMin monthly repayment increased to the greater of 2.5% or £5; fee for going over personal limit cut from £12 to zero. Standard balance transfer fee up from 3% to 5%. Changes apply to all cards.
BarclaycardPlatinum All-Rounder Visa and Platinum 20-month purchase and balance transfer Visa withdrawn; 18-month 0% purchase and balance transfer Visa launched.
DebenhamsCredit card withdrawn.
HalifaxMin monthly repayment increased to the greater of 2.5% or £5 and fee for going over personal limit cut from £12 to zero on all cards. Standard balance transfer fee up from 3% to 5%on all cards except Clarity MasterCard.
Laura AshleyCredit card withdrawn.
Lloyds BankMin monthly repayment increased to the greater of 2.5% or £5; fee for going over personal limit cut from £12 to zero. Standard balance transfer fee up from 3% to 5%. Changes apply to all cards.
MBNAMin monthly repayments increased to the greater of 2.5% or £25.

Fewer loans on the market

Which? analysis of figures provided by MoneyFacts shows that not only has the number of loans dropped in the last six weeks but the choice for people who are not already with a lender has shrunk. And the average interest rate for shorter loans has gone up, despite the Bank of England base rate dropping to the lowest it's ever been.

The number of loans dropped from 66 on 1 March to 63 on 13 April. In March, 21 loans of the 66 were only for existing customers but by April, the number had nudged up to 22.

There were two fewer loans for £1,000 over one year, and the average interest rate had risen by 0.4% to 26.6%.

The number of three-year loans for £5,000 had reduced by three, and again, the average interest rate had gone up - this time by 0.3%, to 15.6%.

There were also three fewer loans on offer in the five-year £10,000 bracket, though the average rate hadn't budged.

Similarly, the number of credit cards for interest-free purchases has shrunk.

On 9 March there were 70 cards but by 9 April there were 67. However, there had been no change to the average APR of 22.2%, or the average interest-free term of 10 months.

Self-employed face greater hardship

Industry sources have told Which? that most lenders are shunning the self-employed unless they can demonstrate a strong cash flow. While specialist lenders or larger credit brokers could have helped in the past, there are no longer any obvious places for many self-employed to go.

Even if you have a high credit score, it may be best to wait for normality to return before applying for credit, or you could end up paying a far higher rate than you'd usually be offered.

If waiting isn't an option, applying for a payment holiday is likely to be a better bet.

Applying for credit: seven top tips

While our research has found that some products are being withdrawn, don't rush into applying. Think carefully about who to apply to, and what product would best suit your finances and needs.

Follow these tips to find the right lender:

  • Don't make multiple applications. This will look like a distress signal on your credit report, putting lenders off.
  • Make sure you match the lender's requirements, eg the minimum income, to avoid denting your credit score with a wasted application.
  • Consider your existing provider if you have had a good track record with them. Although lenders use credit reference agencies, they also depend on their own records and follow their own policies so if you matched up in the past, you may still do so now.
  • If you've used multiple lenders in the past few months and speed is important, consider choosing the provider that was most efficient.
  • Use a credit card eligibility checker, which uses a soft credit check to indicate whether you'll be accepted, before you apply. Many card providers have one on their websites.
  • Apply online rather than over the phone, as it's quicker, but...
  • Be patient. Lenders are facing an unusual combination of difficulties. The sudden demand for credit combined with reduced workforces who are working from home means some delays are inevitable.

Can revealing your pay with open banking help secure credit?

As many as 40% of potential borrowers would have greater access to credit if they revealed their income through open banking, according to ClearScore.

This means making your financial activities visible to providers that you don't currently bank with or borrow from.

The ClearScore claim is based on comparing users in March who had allowed account information to be viewed with those who hadn't.

It argues that open banking gives a more up-to-date view of your finances than a credit report, which can be between one and three months behind. This could potentially be helpful if you've recently cleared some debt or cancelled pricey memberships.

Credit reference agency Experian uses open banking data, and says that the extra information can help lenders decide how much an applicant can afford to borrow.

But if you're not comfortable with the thought of open banking, don't worry: while take-up is growing, it isn't huge, and UK Finance told Which? that it's unlikely to make a huge difference.

A spokesperson told us: 'Open banking is not widespread enough yet to be used extensively, so the vast majority of lenders will continue to rely on traditional credit assessment methods, such as credit scores.