Getting approved for a new credit card or loan could be about to get more difficult, as lenders tighten their belts in response to the coronavirus pandemic.
2020 started well for the personal finance market, with plenty of credit available for consumers, but the most recent Bank of England Credit Conditions Survey reveals that lenders expected availability to decrease in the coming months.
The survey, which aggregates data anonymously across a panel of lenders, also predicts that around a third of lenders will tighten up lending criteria, meaning that even where products are on offer, it will prove harder to get accepted and mean that creditworthiness is likely to become even more important as a factor.
Why are lenders lending less?
There are a number of reasons for the gloomy outlook painted by the survey results, the data for which was collected across the first few months of March when the coronavirus pandemic was starting to really take hold just before the UK lockdown was formally announced by PM Boris Johnson.
As far as mortgages are concerned, a big part of the problem is simply the limitations imposed by social distancing guidelines. As well as the number of house viewings – and therefore new transactions - being severely limited, lenders have been unable to conduct full surveys and valuations. Without the extra reassurance of such surveys, lending has been restricted on properties above a certain value or loan-to-value.
Fear that property prices may fall is also playing a part, again especially where LTV rates are higher, meaning that mortgage lenders are more exposed to negative equity than they would want to be.
The easing of those restrictions in mid-May could alleviate some of those barriers, but availability of credit is still almost certain to be down on what it was at the start of the year.
In general terms, both secured and unsecured lending is also likely to be limited by lenders being more cautious, at least for a while.
Alongside all this is the harsh but true fact that large numbers of consumers will either lose their jobs or see their income (at least in the short term) fall, even before lending criteria is considered. The lack of a regular income would be one of the first things to prevent an application from proceeding.
Why might consumer demand for credit fall away?
With an estimated 25% of the UK’s workforce being supported by the government’s furlough scheme, and many more far from certain over their future, non-essential spending is on hold for a large proportion of the population. That has a direct impact on the need for credit.
Even if consumers were prepared to spend money on things other than grocery shopping, home office equipment and new exercise kit, the capacity to do so is severely limited right now.
For example, new car registrations fell 97% in April compared with the same month in 2019, with just 4,321 new cars being sold. Over 80% of new car sales are funded by finance, leaving a big hole in that particular market. Even when new car sales are allowed to resume, it’s likely that volumes will be down for some time.
International travel and holidays are another industry that has been decimated. With a large proportion of people using credit cards when overseas – and many of those getting a card specifically for that reason – the volume of new applicants for that reason is likely to drop off.
The story is the same across a huge variety of industries – home renovations are largely on hold, and credit cards with rewards like airmiles are surely a thing of the past.
What can consumers that are looking to borrow money do?
Lending and borrowing isn’t about to stop dead - banks need to lend money and consumers will always need to borrow it. But with lenders potentially becoming that bit more selective over which applications they approve, a strong Credit Rating is going to be even more important than ever.
Lenders want to be as sure as they can be that whenever they do lend money, they stand a very good chance of getting it back, and on time – basically evaluating risk.
One of the main factors used in working that out is credit scoring, where the way that you have managed credit agreements in the past (combined with a number of other factors) is used as an indicator of how you’re likely to behave in the future.
There is another layer to any application, known as rating for risk. That essentially means that as well as determining the overall outcome of an application, your Credit Rating will help determine the interest rate and credit limit you are offered – with better deals and lower interest rates reserved for customers with better ratings.
The information that is used for these decisions is held by the UK's Credit Reference Agencies – each holding and reporting different information.. Different lenders will use different agencies to assess applications and will very often (and definitely in the case of mortgages) check what is being reported at more than just one agency.
Even in ‘normal’ times, if your Credit Report isn’t in tip-top shape – either because of your past credit history or because of error in the data (they’re rare, but they do happen), you might find yourself struggling to get approved. It seems that’s about to become even more true.
You can think of an excellent Credit Rating a bit like those priority passes you can get at theme parks – they help you go to the front of the queue and you’re unlikely to be turned away. It’s quicker, easier and less stressful.
So, even if you’re not thinking of applying for credit immediately, it pays to make sure that everything is as it should be.
The fastest, easiest and best way to check everything being reported on your Credit Report across all three of the UK's Credit Reference Agencies is with checkmyfile.
You’ll find no gaps, just the most detailed service there is, with the best customer service to match. If you do find something you need help with, our professionally qualified Credit Analysts are on hand to help.
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