Month: July 2020

Consumer Credit Borrowing Shrinks to Weakest Annual Rate in 26 Years

July 31, 2020

Bank of England figures. "Households’ consumer credit borrowing shrunk by 3% annually in May, marking the weakest growth since records started in 1994."    Covid-19 has, no doubt, pulled hard on the economy. But, can we begin to understand the impact? Recall that in 2016, the debt owed in unsecured borrowing hit high at £270bn. In general, each household was estimated to have been about £10,000 in debt. These debts rose from personal loans, overdrafts, and credit cards. This report is according to PwC and also predicted that unsecured borrowing will rise by 165% in 2020. At the time, employment was on a positive rise, and people earned above the rate of inflation. It was only in January when consumer credit borrowing increased by 0.3% for credit cards and 0.6% for other forms of credit. This rise remained the same in February. Although, based on a yearly report, February saw a 5.7% rise in bad credit borrowing. Credit cards rose by 3.5% and other forms of credit rose by 6.9%. With the onset of the Covid-19 pandemic, many families have put a hold on borrowing and short term loans. They have been invested in living on what they have saved and not incur more debt on themselves. This saw March nosedive in the rate of unsecured consumer credit borrowing.  May was hard hit as the credit borrowing margin showed a 3% contraction. This includes borrowing in the form of credit cards, personal loans of £100 £200 and £500 pounds, quick loans, and overdrafts. Prior to the drop in May, records in April show a one year fall at 0.4%. February had shown a positive rise in consumer credit borrowing. Experts expected it to rise further by £0.7bn. Since taking a downturn in March, the spiral down has only worsened. By May, credit card lending was still on the nosedive by annual growth rate. This fall in the negative has carried on for 3 consecutive months. It is currently perched at negative 10.7%. However, while credit borrowing is going down, other types of borrowing have stayed positive. The rise is shown to be at 0.7%. According to the Bank’s Money and Credit report, most households are more interested in paying off debt than taking on new debt. The accumulated effect of Covid-19 weighed heavily on the month. Though it is difficult to ascertain if it is only a case trying to repay debts since social distancing laws have put a restriction on gatherings. Mortgages have not been unaffected. Homebuyers have received a lot less approval on their applications. Plus, people seem less eager to buy new homes during this time. According to the Bank's report, May also saw the lowest number of mortgages approved for home buyers. The figure stands at 9,273 which is nothing the Bank has recorded from the time it started tracking the mortgage approval figures. Even the financial crisis in 2008 saw better figures since it recorded about times over in the mortgage approval.  Savings have seen an upsurge in the whole event. Households have taken to saving more than they spend. Deposits in May rose as much as £25.6 billion. This is £11.3 billion rise from savings in March that totalled £14.3 billion. In April, the deposit was £16.7 billion, a £2.5 billion rise from savings in March. In the later parts of 2019, deposits had remained a steady rise. Only six months to February, household deposits had grown steadily at an average of £5 billion monthly. However, a rise in deposits didn't mean a rise in interest rate, according to The Bank. From their report, May also saw a fall in the typical rate of interest paid on people’s deposits. New deposits were paid interest at the rate of 0.87% while outstanding deposits were paid at 0.29%. As for borrowers, typical interest rates have become cheaper than it has ever been.  New personal loans have been charged a typical interest rate of 5.10% in May. Since the Bank began to keep records in 2016, this is the lowest rate have gone. Just at the beginning of the year, the rate had been at 7%. Personal loans were not the only rates that plunged. Credit card borrowing rates also declined. The typical cost came down to 18.36% in May. In April, it had been 18.54%, showing a 0.18% fall. Against the backdrop of the May decline in financial borrowing activities, June seems to boast better returns. With recent records from indicators of buyer interest, parameters like how many people are browsing property websites have picked up to what it was pre-COVID. This only suggests that mortgage approvals are likely to bounce back in June. Here is what Samuel Tombs, chief UK economist at Pantheon Macroeconomics, has to say: “Households’ spending likely will rebound over the summer, as some recently accumulated cash is spent in reopened shops and businesses. Nonetheless, employment looks set to decline in the autumn when the Government’s income support schemes are set to be wound down, while low consumer confidence suggests that households will seek to save a larger proportion of their incomes than they did pre-COVID. Accordingly, we continue to think that households’ spending will still be about 5% below its pre-virus peak in quarter four, even if the second wave of Covid-19 is avoided. Mr. Tombs has also opined that it's not a surprise that May came with a further downturn in mortgage approvals for house purchases. This says this because it is only recently that the housing market has gradually begun to reopen. He goes on to say that: “Indicators of buyer interest, such as the number of people browsing property websites, have fully recovered to pre-COVID levels in recent weeks, suggesting that mortgage approvals will pick up in June.” On another note, he says: “Lenders have become much more cautious, removing high LTV (loan-to-value) loans from the market and refusing a larger share of loan applications. Accordingly, we still expect mortgage approvals to finish the year down 10% year-over-year and look for a 5% peak-to-trough fall in house prices.” When Mark Harris, chief executive of mortgage broker SPF Private Clients spoke, he said that: “Covid-19 has had a devastating impact on the mortgage and property markets, so it is no surprise that lending was weak in May, with approvals for house purchase falling. With lockdown meaning that lenders were unable to send valuers out to physically view properties, the number of mortgages approved fell considerably. Lenders were kept busy processing mortgage payment deferrals and trying to get to grips with staff working from home rather than call centers, meaning it was far from ‘business as usual’.” Only a final note, he admits that lenders are beginning to clear their backlogs and so, “we expect mortgage approvals to pick up”. May has not been good on consumer credit borrowing, no doubt. Even though June looks promising, one can only keep their fingers crossed. Especially since predictions as close as February took the opposite turn. With the ease in lockdown, perhaps valuers can visit properties now and access them. According to Mark Harris, this should lead to a turn-up in mortgage approvals.  However, there is no telling. Going by the words of Mr. Tombs, more people might be cautious about spending this summer since autumn does not hold a lot of promise. It is likely that savings might begin to go down later in the year since government support would have dwindled. While savings will begin to go down, credit borrowing will most likely shoot up. This will likely cause the typical interest rate on borrowing to go up, as well as a typical interest rate on savings.

People need credit cards for different reasons. But the basic reason is access to credit If you're moving house, for example, you need to buy some furniture. Assume that you expect money in your account at the end of the month. But you're moving in the first week. 

What do you?

Simple option: get a credit card and payback at the end of the month. However, no one just walks into a credit card provider's office and walks away with a card. You have to prove that you're worthy of the credit card. This information is provided in your credit file. Now, the type of card you get depends on the information your credit history provides. Usually, people who have defaulted in credit repayment are less likely to be in favour of lenders. Also, if your records show that you have been consistent with repaying cards then you're more likely to get a competitive interest rate. Before you choose your credit card lender, you need to learn the types of credit cards. Credit cards vary according to the value they offer. Lenders make these offers with specified terms and conditions. Even though some of them sound enticing, it's always important to compare the underlying risks.

Types of Credit Cards

There's an abundance of credit cards types. The choice you'll make depends on the need you have for a credit card. 

Credit-Building Credit Cards

The first set of people who need this card are those who have no credit history. The next set is people with bad credit history. For people with no credit history, it's difficult to gauge how responsible you are with credit. As a result, a lender assumes that you are a risk. He just can't tell how much risk you are. People with bad credit history can take another chance at showing that you can be more responsible. There's no reason for lenders to believe you but you have another chance.  This credit card comes with higher interest rates. Plus the limit on credit is a lot lower. Using this card with discretion and making payments on time adds to your credit points. Over time, you will have a good credit history and can apply for better cards. Credit Card: Barclaycard Forward credit card  Suitable for first time credit card holders and card holders with bad credit history. This card offers a personalized credit limit that lies between £50 and £1200. The representative APR and purchase rate go as high 33.9%. However, with Barclaycard Forward credit card, you can work your way to a 3% reduction in the standard interest rate within your first year of owning the credit card.

Balance Transfer Credit Cards

Sometimes you may want to transfer your credit from an old card to a new one. A balance transfer credit card allows you to do that. The terms depend on your credit card provider. Some lenders offer a 0% balance transfer. This allows you to move your credit without interest charged for a stipulated time. In some cases, the 0% offer comes with a 0% offer on purchases. This can help you keep track of your debt. However, some banks charge for the transfer. The charge usually accrues to some percentage of the amount you're transferring. You may want to be sure that the charge is not higher compared to being charged interest. Credit Card: Virgin Money Credit Card This credit card allows you to transfer money from other cards at no cost up to 24 months. With the introductory promotional rates, you get to enjoy a 0% interest rate on balance transfers if you transact within the first 60 days of account opening. The representative APR is stated at 21.9%. 

Student Credit Card

Before you can get a student credit card, you have to prove that you are a student. This credit card works similar to a credit-building credit card. As you use the card and repay your debt in good time, more points are accrued to your credit history. Student credit card is attached to the current account facility of the student. It is offered primarily to students in the university. Credit Card: AIB Student Credit Card  Offered by former First Trust Bank, this student credit card offers holders as low as £300 credit limit. It comes with no additional cost of maintenance and a 12.9% interest rate on purchases. However, you need to have an existing account with AIB to apply. The representative APR is 12.9%. 

Purchase Cards

It often happens that you need to make big purchases over a period. But you also want to circumvent the interest charges for this time. Purchase cards with 0% interest offer can help you achieve this. Usually, lenders offer a 0% interest for a specified period. It may run from one month to 36 months. Albeit, you have to pay back your credit before the interest time expires. Otherwise, the bank charges interest on the balance you have left. Credit Card: TSB Platinum Purchase Credit Card TSB offers 0% interest rate on balance transfer and purchases up to 20 months. The introductory deal allows you to enjoy this offer if you make a transaction within the first 90 days from the day your lender opens your account. The representative APR is 19.9%. 

Money Transfer Credit Cards

Suppose you have made some overdraft from your bank account. Or you want to take some cash loan that is not too high. A money transfer credit card comes handy. This card can also come with an offer of 0% introductory time. This means that you won't be charged any interest for making a transfer to your account for a specified time. So, you can pay off your debt without a lot of financial pressure. You have to ensure you pay off whatever your debt is before the 0% interest period expires. Credit Card: MBNA Money Transfer Credit Card If you’re in need of immediate cash loans without having to pay interest immediately. You get a breather for transfers you make within the first 60 days for up to 24 months. There are no annual fees and representative APR is at 22.9%. 

Reward Credit Cards

A reward credit card offers you some points each time you use your card for a transaction. These points accumulate into benefits like hotel vouchers, air miles, and shopping vouchers.  This type of credit card is usually beneficial if you have a good credit history and if you pay off your debt in time. Otherwise, the reward on them diminishes in the face of the associated interest.  If you are a big spender, the reward on purchases will make even better sense to you. This is because the lender may specify an amount that you have to earn before you can benefit from the reward. The card may also be affiliated with a specific brand for you to enjoy the reward.  Be sure that the reward offered by your lender outweigh the charges that come with owning the cards. Credit Card: M&S Bank Reward Plus Credit Card This card offers an introductory earn-point of 2000 worth £20 on all cards used within the first 90 of registration. Subsequently, you get double points on your transaction for up to 12 months with a 0% purchase interest rate that lasts up to 6 months. Representative APR is valued at 19.9%. 

Cashback Credit Cards

Cashback credit cards give you some cashback to your account when you make spendings from them. They typically work like reward cards, except that you earn cash in return for your loyalty. They are suitable for you if you are consistent with paying back your debt on time and if you prefer cash rewards against points rewards. The earn-rate on a cashback credit card often depends on how much you are spending and where you are spending. If the card is affiliated to a brand, you usually stand more chances of earning back when you spend with the associated brand. Plus the reward will usually be higher. Be sure this credit card benefits your spending habit before you apply for it. Credit Card: American Express Platinum Cashback Credit Card This card offers you up to 5% earn-points on transactions up to £125 when you use your card within the first 6 months. You can enjoy other benefits from the lender’s partners plus cashback on subsequent transactions with your card. The representative APR is stated as 27.3%. 

No Foreign Transaction Fee Credit Card

If you travel a lot or tend to buy products and services from international retailers, you may need a card that charges you little or nothing on your transactions. With this card, your transaction will be converted to the local currency at the rate offered by the card network provider. Some no transaction fee credit cards may still charge you some interest. Plus, they may not be of use if you’re shopping or traveling beyond Europe. So, check to be sure what you are getting. You can have a backup card which you use in the UK while reserving your travel card exclusively for foreign transactions. The transactions on your card may involve a charge when you make cash withdrawals outside the UK. Ensure that you are aware of all charges that come with owning this card. Credit Card: Royal Bank of Scotland Credit Card  If you’re huge on spending overseas, get a RBS credit card. It converts your spending to the currency of choice at mastercard rates without any extra charges. You also don’t need to pay any annual charges. The representative APR is placed at 9.9%. 

Frequent Flier Credit Card

For people that fly often, a card that gives you points reward on your travels will be a huge add. For every transaction you make with the card, you can get back an air mile or frequent flier point when you can transfer to your preferred loyalty programme. There may be some added charges, that annual fee, to running the credit card. But in some cases, your points reward may outweigh the charges. Check if your lender accrues the points reward to a particular airline or if you can redeem the points with any airline. There may be some introductory promotion that offers you some accumulated points at the initial stage. As always, the benefits have to be more than the charges for it to be worth your time. Credit Card: British Airways American Express Credit Card If you’re always flying, get a British Airways Amex card. It comes with an initial credit bonus of 5000 for Avios loyalty scheme. You activate this bonus when you make transactions up to £1,000. You can also enjoy perks like automatic enrollment into British Airways Executive Club. The representative APR is 22.2%. 

All-rounder Credit Card

Have you thought of how you may be a bit of everyone listed here? You are a traveller who spends a lot in foreign currency. Plus, you make huge expenses when you’re at home and need some sort of “interest breather”. This card offers you 0% on balance transfer and purchases. Plus, it offers you reward points on your spendings and no transaction fee on foreign spendings. The card lender may offer this card to you with reference to a specified minimum earning. Plus, none of the benefits offered may be at its best. It’s not very convenient to use this card if you have a specific need you're looking to meet. For example, if you need to transfer credit balance to a new card. The deal period on an all-round credit card may not be as long as if you’re using a balance transfer credit card. If you have specific needs to meet, it’s better you opt for the specific credit card. Credit Card: Virgin All Round Credit Card Virgin All round credit card offers 0% interest on balance transfers, money transfer, and purchases. The time for balancce transfer plan goes up to 18 months, 12 months for money transfer, and for purchases is 15 months. Introductory plans can be enjoyed within 60 days of opening an account. APR is placed at 21.9%. 

5 Frequently Asked Questions

Here are answers to some frequently asked questions on credit cards. What is the best credit card for me? The best credit card for you will depend on your situation and needs. The situation includes credit history and how much you earn, amongst other things. You also need to decide what you want your credit card for. If you want the card for more than one reason, make a list and place the need in the hierarchy. Choose your card based on the most important reason.  Also, compare credit cards according to the rates they offer. The reward a lender is making should not outweigh the benefits for you. If you need cash short term, then a short term loan might be a better option for you than a credit card. Can I change my mind after I’ve applied for a credit card? Yes. It’s possible to change your mind after you’ve applied for a card and received it. But, bear in mind that you may have accumulated some credit during the period which you will need to clear within 30 days. Lenders require you to cancel within 14 days from the time you receive the card if you have a change of mind. How long do I have to wait before I receive my credit card? After the application process, how long you have to wait depends on your lender. Often, it ranges within 1 to 2 weeks. You’ll also need to activate your card when you receive it. Activating your credit card helps to protect you from fraud when using it. If you need fast cash and can't wait for a credit card to be approved then you can take a look at what quick loans have to offer you. In the UK you can get fast cash loans of £100 £200 and £500 without any problems. What if I have a bad credit history? There are cards reserved for people with bad credit history. It’ll help you build your credit score again. If you apply and get issued one, you need to be responsible with your spending and payments. Over time, you can demonstrate that you can be trusted with credit card facilities again. I applied for a credit card but I was declined. What do I do? The first thing you want to consider is reaching out to your intended lender to find out why you were declined. Be sure it wasn’t an oversight. But avoid multiple credit card applications. They put a dent on your credit history by making you appear desperate. This will also make lenders unduly cautious of you. You still have options, you can go for bad credit loans that do not require a guarantor.

Kelvin has decided he needs to buy a car. He thinks having a credit card will help him achieve that. While talking to Anna, she mentions that he needs to compare the Annual Percentage Rate (APR) for the lenders he’s considering. Kelvin wants to know more about APRs.  You may be like Kelvin, considering making purchases with a credit card or taking a loan from a lender. You need to understand the rates offered by your lender before you get into taking a credit card. You don’t want to wake up to surprises on how much you have to pay when the charges begin to come. An Annual Percentage Rate (APR) is the charge accrued to you yearly on your credit card or the money you borrow. In simple terms, how much extra you have to pay back on loans and purchases. This is determined mainly from the advertised APR of your intended lender and your credit score. If you have a bad score on your creditworthiness, you’re likely to have a high APR from your lender. There are special loans for very bad credit. APR is represented in two major ways: Representative APR and Personal APR. Representative APR gives you a clue to the standard APR charge of a lender with regards to credit cards and purchases. Personal APR tells you what the lender will charge you which doesn’t necessarily coincide with the charge on the representative APR.

Representative APR

When applying for a credit card, it’s always safe to compare the rates of different lenders. You can find this comparison on a credit broker site like Dot Zinc Limited. Credit brokers help link you to lenders and provide you with information about these lenders so that you can make a good choice. The Representative Annual Percentage Rate on a lender’s advert shows the rate they offer to about 51% of their clients. This also means that you are not likely to get the same percentage. Your rate will be often higher against lower than the advertised rate. The rate also represents the percentage you will pay for £1,200 every year. Some lenders charge an annual fee in addition to their APR.

Here’s a typical example.

One lender offers 25.9% (variable) advertised APR on their site with 0% purchases for 3 months. This means that they charge 51% of their clients 25.9% APR every year at £1,200. If you have a good credit score, you may as well receive a 0% APR on purchases for 3 months. Because this score is only a representative, you have 1 in 2 chances of being charged at this rate. Depending on how good you are on credit, your personal rate may not go too far from this advertised rate. Another lender may advertise a lower APR and attach an annual fee to it. For example, 20.9% representative APR and £100 annual rate. But one thing to note is that the representative APR does not say anything about the benefits that a lender offers and the charges on other transactions on the credit card such as balance transfers or cash withdrawals. Other charges not represented by the APR include the credit limit your lender offers you based on your eligibility, late payment, and fees paid by default. The credit limit varies between different borrowers and the circumstances of borrowing credit. You will do well to look closely at the terms and conditions before you make any credit/lender decisions.

Personal APR

The APR your lender offers you based on your particular situation is your personal APR. It depends on the amount of money you intend to borrow, the history shown on your credit form, and your financial position. If these factors do not match their criteria for the representative APR, you will get a rate calculated to match your situation. APR accrues to credit cards and loans. For credit cards, when you borrow, you can pay off at once at the end of each month or you can pay it off in installments. Usually, paying off your debts at the end of each session will save you from paying any extra rates like APR. Paying install mentally means that the APR applies to you monthly as you pay off your debt. Plus, you have to pay off the bill before the payment period expires if you must show yourself as being creditworthy. APR charged on loans differ from those on credit cards. Credit cards are often offered for small loans of £100 £200 and £500 pounds. Supposing you want to buy a car of £10,000, you’ll be better off taking a loan because the APR over time will be easier to deal with. APR also accrues to hired purchases.  Lenders only begin to check your Annual Percentage Rate after you submit an application. Some offer you some hint to determining if you are eligible for their representative APR or not. If you are not, it’s often safer to assume that you may get a rating that is higher than what they have advertised. They’ll also charge a certain fee for the processing before they issue you the card.

Variables That Affect Your Personal APR

The values that go into calculating your personal APR include: Interest rate, the processing fee charged by your lender, charge period (which can vary as yearly, monthly, or weekly), and other charges that compulsorily accrue to the loan.  A lender would go through your credit portfolio to see how credible you are and how much you falter with repayments. With this, they decide what rate to place you at. If you have been faltering much lately with your repayments (which include contracts on mobile phones), they will be more likely to place you at a higher rate because you represent a high risk to their business. If you don't want to build up higher APR payments you will be better going for a short term loan.

On Credit Score

You need to manage your credit worth intentionally. Lenders intend to make money from their business so they are less likely to want to take on anyone with huge debts or that represents a huge risk. It also means that in the case they decide that they want to risk it, you will have to pay higher. In some cases, you may be charged as high as 30% more than the representative APR.  Simple ways of regulating your credibility include paying off your debt at the end of each charge period if you are using a credit card, paying your loan as at when due, and ensuring you don’t falter with deadlines. Life happens now and then, but a conscious effort will help you stay on a good track. Even with a poor credit score, you can get a quick loan, sometimes on the same day.

Frequently Asked Questions

Is there a difference between Interest Rate and APR? Think about it like this: There’s a set market interest rate for every lender to work with. This interest rate will vary over time. Also, your lender has to take on risks to provide you with the money you want. Those risks may include paying back the money before the agreed time of your repayment, credit charges, etc.  The money you borrow is called the principal. The extra charge on it by the market standard is called the interest. This interest is charged as a percentage of the principal. So, suppose you borrow £10,000, the market interest may require you to pay back 10% of £10,000 along with the initial money. In simple terms, you’ll be paying back £11,000. However, the risks which your lender has to take on your behalf impart the amount of interest he charges you. Suppose he takes risks that accrue to £200. This is 2% of the principal he lent you. When he adds his risk to the market interest rate, he now has to charge you about 12% interest rate. This makes the APR charge for a lender.  Will I be charged the same APR for the period of payment? Now, because market interests change alongside risks, APR to changes. Most lenders will denote their representative APR as a variable. This means that it will fluctuate as the market interest rates and other factors fluctuate. Sometimes, it may fluctuate in your favor and you pay a lot less. Other times, it will go way higher causing you to pay more. Why do I need APR? It’s important to regulate businesses such as lending to prevent any lender from taking undue advantage of their clients. APR helps you see how effective the regulation works for you because you can tell how the lending company is serving you. The APR shows you what the market interest rate says as well as what other charges the company accrues to you. Because every lending company works with the same interest rate, you can see what each lender is offering you through the APR. You can easily compare the values between different lenders to decide which one works better for you. Even though APR does not show every detail of the charges associated with the loan, you can tell the basic services which they are charging you for. What are the APR charges on my credit card? When calculating APR on a credit card, lenders assume that you want to borrow £1,200. They also assume that you want to spend this money in one day and pay it back over some time (i.e. 1 year). In most cases, they have a set annual fee for their clients which represents the risks they take to lend you money over one year. This annual fee is calculated as a percentage of £1,200. Your lender adds the interest rate to their risk rate to make up their APR charge for your credit card. So, late payments, withdrawal charges, and charges for overdraft are not included in the advertised APR. They are more or less hidden APR charges that are determined according to individual usage and the contract with your lending company. Do I have to pay any interest if I pay my credit balance on time? APR is charged on credit card balance when you have to pay back install mentally. This means that when your lender sends your bill at the end of a charge period (say, one month) and you pay off in full, you don’t have to pay any interest for the money borrowed. This doesn't mean that you don’t have to pay for the credit card you own. Credit cards cost money and in some cases, you have to pay an annual fee to maintain it.  Is 0% APR beneficial to me? Some lenders may advertise 0% APR on their loans. These are usually given for purchases and as a means to buy the interest of the borrower before they revert to variable APR. While 0% APR might have such hidden charges as inflated prices, they often help a borrower who intends to make purchases within a period while holding off interest rates for that time. In general, 0% APR can be very beneficial to you if you can figure that the purchases don’t come at an inflated price and if you already have high expenses to make within a given period. What is the difference between fixed APR and variable APR? Variable APR represents charges that fluctuate with market interest rates. It means that if the base interest goes up, your lender will increase the rate they charge you and vice versa. With fixed APR, your lender has to keep the bargain of the charge they signed with you irrespective of whether the base rate goes up or not. Fixed APR and variable APR can both go in the favor of the borrower or the lender over time. Is there a difference between APR and APRC? Yes. APR is used for unsecured loans such as credit cards while APRC is used for secured loans and mortgages. Unlike APR, APRC ( or Annual Percentage Rate of Charge) requires the lender to state entirely the rate accrued to the loan or mortgage for the entire period of the loan. However, this rate does not stay steady since the base interest rate may change over a period. Just like APR, APRC may have fixed or variable interest rates. A fixed-rate will stay steady even if the market rate changes but a variable rate will change with standard rates.

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