Three steps to improve your borrowing potential
The banks are proving as tightfisted as ever when it comes to lending, meaning we've all got to work that bit harder to borrow money.
Whether you are shopping for a personal loan, mortgage or credit card, the potential lender will look at how much credit you already have access to. So to improve your chances of getting a loan you should reduce the credit you already have.
1. Work out your credit limit
The first thing to do is add up all your credit card limits and overdrafts so you know exactly how much credit you already have at your fingertips.
2. Decide what credit you need
Now you know how much credit you have you can work out how much you need. You may find you don't need the loan you were going to take out as you can simply use the credit you already have. But check the interest rates of your credit first.
3. Eliminate the excess credit
The next step is to get rid of all the credit you have access to but don't use. This means cancelling credit cards and closing bank accounts with overdraft facilities you don't need. You should also consider reducing the credit limits on your credit cards or your overdraft if you never go close to your limit.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.