ClearScore has revealed that the worst of the credit crunch caused by the first wave of Covid-19 may be over as credit products begin to return to the market.
The UK’s leading free credit score and credit marketplace said the average number of pre-approved credit cards is now back to 79 per cent of January’s levels.
The number of loan products rests at 62 per cent of January’s levels, compared to just 30 per cent in April during the height of lockdown.
This increase in availability of credit card and loan products is mirrored by an increased appetite from consumers, with 34 pe cent of people prioritising switching or taking out a new credit card and 20 per cent saying they were likely to apply for a personal loan in the next six months.
When asked the reasons for taking out a credit card or loan, 34 per cent said that they were trying to build up their credit score, while 27 per cent wanted it as a financial safety net.
The UK Government’s furlough scheme is set to end in October, making the risk of further redundancies a harsh reality for many workers, so it’s not surprising that 28 per cent of people are prioritising paying down short-term debt.
With a 61 per cent increase in the number of pre-approved credit cards available in August (38.31) compared to July (23.72), the average consumer could save a staggering £626 by switching existing credit card debts to a new credit card this month.
CEO and co-founder of ClearScore, Justin Basini said: “The pandemic has provided an opportunity for many to hit the reset button on their finances and take the time to organise their spending and pay down any outstanding debt.
“With government and industry financial schemes set to wind down by the end of October, now is the time for people to make the most of the credit options currently available if they are in the market for credit.
“Whilst the availability of credit products has increased, it’s important for consumers to fully understand the terms of any products they may take out to see them through the coming months.
“Our research has shown that the average credit card APR has risen by a weighty 32 per cent during the course of the past eight months. And with almost half (47 per cent) of people admitting to not knowing the APR on any of their credit products (including credit cards, loans and mortgages), this substantial increase in APR during the last eight months could end up costing unsuspecting consumers dearly.”
Credit jargon buster to help consumers make the right choice when choosing credit products.
APR (and representative APR)
APR stands for Annual Percentage Rate. This is the cost of your credit across a year. For example, if there’s a 12% APR on your credit card, that equals 1% interest a month. So if you do not repay a bill of £100, £1 (1% of £100) will be added to your bill as a cost and roll into the next month (assuming no additional fees).
The representative APR is what appears when cards are publicised. Credit card providers have to give the advertised rate or less to 51% of people who take out the product. When you see the representative APR, you won’t necessarily get that APR depending on your credit rating and financial circumstances.
0% Balance Transfers
You can move your outstanding debt from one credit card to another via a balance transfer. There is usually a small fee to perform this transfer, but some balance transfer cards offer lengthy 0% interest periods on transferred balances. This means you can pay off your debt in manageable chunks without being charged any interest.
Minimum repayment
This is the minimum you need to pay towards clearing your outstanding credit card debt each month. For example, it might be 3%, meaning each month you will have to repay at least 3% of your card balance.
Remember that only paying the minimum each month means that clearing your debt will take much longer and could cost you a significant amount in interest payments on top of the balance left on your card.
Credit limit
When you take out a credit card, you’ll be given a credit limit. This is the maximum balance that you can run up on the card.
Your credit card provider can sometimes increase or decrease this limit, and the better you are with credit, the greater the likelihood you’ll be trusted with a higher credit limit.
As a general rule of thumb, it is a good idea to stay within 30% of your total overall credit limit to demonstrate that you can manage credit well. For example - if your credit limit is £1,000 across multiple credit cards, try to only use £300 at any given time.
Default
If you default on a debt, it means you have failed to pay it back according to the terms of the agreement with the credit provider.
So if you don’t make your regular loan repayment on time, you are said to have defaulted. Defaulting is one of the behaviours that can most negatively impact your credit score, so we would always recommend setting up a direct debit to automatically pay your credit, or setting an alarm to remind you to pay your credit bills.
You can find out more about ClearScore here.
