How lenders can change your interest rate even after an account has been opened

Posted by Kiah Phillips in Credit Check on 24 January 2018

Most people are aware that your credit report and rating have a heavy bearing on whether a lender accepts or declines an application, and the rate of interest that comes with the account. However, not everyone knows that credit scoring – in the form of a particular lenders’ appetite for ‘risk’ - can continue to have an impact on your account even after it has been opened.

Why do lenders change their interest rates?

Using credit cards as an example, the interest rate that it comes with isn’t just there to make the lender money. It also serves to give the lender some protection against ‘bad debt’ – basically the proportion of customers that end up defaulting on a credit agreement and not paying back what they owe.

Each lender has its own target market, and the interest rate that it charges will vary accordingly. Known as rating-for-risk, in simple terms, the more likely a customer (or group of customers) is to default, the higher the APR will be.

Is a lender allowed to change an interest rate once an account has been opened?

Yes, a lender can vary the terms of a credit agreement, as long as it makes the change in the correct manner. There are a few occasions when this might happen.

Their general appetite for risk changes

The recession in the UK, following the banking crisis of 2008, saw lenders across the board re-assess their potential exposure to bad debt. This meant that as well as adjusting their acceptance criteria (some of it voluntary, some of it forced via increased regulation), many lenders took steps to update the interest rate that existing customers were asked to pay. This resulted in thousands of consumers receiving notice that their interest rates would be increased – even in cases where there was no evidence of payment difficulty.

They reassess your credit rating

Lenders can continue to search customers’ credit files throughout the course of their credit agreement. That means if they decide that you have become more of a risk to lend to than when the account was opened, you may find that they increase your interest rate or cut your credit limit.

In some cases, it may take a single missed payment to trigger a change, but consumers are protected against being put under even more pressure if they are deemed to be in financial difficulty. If an account is two or more payments in arrears, or if the customer has arranged an alternative payment plan with the lender then the interest rate associated with the account cannot increase. In fact, codes of practice such as the Lending Standards Board Lending Code and Credit Services Association Code of Practice mean that a lender should reduce interest and charges on an account when a consumer has informed them that they are in financial difficulty.

You miss a payment or breach the terms on an ‘introductory offer’

Introductory offers are a widely used tactic aimed at attracting new customers or poaching them away from competitors. They generally offer 0% (or very low interest) for a fixed period on purchases, balance transfers, or both. These offers are great for consumers, as they offer a way of funding a big purchase or moving an expensive existing balance, but fail to adhere to the terms and conditions and it could all change. As little as a single late payment is often enough to see the ‘offer’ rate forfeited, and for it to revert to the standard APR. In cases where the balance is a significant one, this could mean some pretty hefty interest charges.

How to protect against it happening

Lenders look for consistency and stability when assessing your credit applications and deciding which interest rates they are happy to offer you. This is equally true once the application has been accepted. Make certain that you are making your minimum payments on time so that your payment history is clean and this will reflect positively on your score. If you set up a direct debit for the minimum payment each month you can ensure that a memory lapse or busy schedule does not blemish your repayment history leading to a change in interest rates.

Don’t let old financial links factor into their decision either, if you are no longer financially associated with an individual, you should request that their name is removed from your report by way of a Notice of Disassociation. This will ensure that someone else’s credit score isn’t costing you a higher level of interest.

Your rights

There are a few obligations that a lender has if they wish to change your interest rate. As of February 2011 lenders must legally inform customers that their interest rate will be changing in advance of it happening, accompanied with a valid reason for doing so. If the increase is due to a change in how they have assessed the risk in lending to you then they must tell you this and provide an explanation. This does not however mean that they have to give a specific reason, or explain exactly what part of your credit report has led to the change.

A lender should not increase your interest rate within the first year that you have the account and should not increase the rate more than once every six months.

If your interest rate is increased the lender must allow you to close the account should you wish. If you notify them within the first 60 days of being notified of the increase, you should be allowed to close and settle the account at the current interest rate. If you choose to close the account you may wish to switch to a different provider, but bear in mind that if your credit rating isn’t great, you might struggle to find a lender prepared to offer you a better deal.

Other ways it can affect you

In addition to changing your interest rates, your lender can also change your credit limit. Even if you don’t use all of your credit capacity every month, this will make a difference to your credit utilisation ratio, which can jump up significantly once the limit has been lowered. This can make it difficult to apply for any other additional types of credit if it then makes it look like you are getting close to maxing out your credit facilities every month.

Use your credit file to your advantage

You can gain a better understanding of how a lender may view your credit report, even after your application has been successful, by monitoring it regularly and checking that everything is reported correctly. Carefully review how your payments have been reported and that your Electoral Roll listing is still being returned. If you wait until your interest rate rises before looking at your report, you put yourself at risk of paying more than you should in the long run.

If you haven’t already checked your credit file, you can see your Multi Agency Credit Report at checkmyfile – it is free for 30 days, and then costs just £14.99 per month, and you can cancel at any time.

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