Jeff Salway: Rejecting poor credit terms can drag you into a vicious circle

Published on Friday 30 October 2009 20:29

SHOPPING around for a better deal is one of the great money mantras, but it doesn't always pay. The Treasury select committee has this week been hearing about the potentially far-reaching implications to consumers of making multiple applications for loans or credit cards.

The squeeze on credit in the past two years has made affordable finance harder to come by, increasing the number of searches individuals must make in order to find the best deals. But what many do not realise is that those searches – regardless of whether or not they succeed – have an impact on their credit ratings, which in turn influence lending decisions.

Part of the problem is the risk-based pricing that providers increasingly employ, which means consumers often have to file applications just to find out what kind of rate they will be offered. In some cases, the advertised rate for which they applied is unavailable once they have been accepted, giving them the option of settling either for a higher rate or applying for another deal.

Few people are aware that the search itself is logged on their credit file in a way that fails to make it clear to companies scrutinising those files in future that the applicant was not rejected but chose to go elsewhere. And as good deals become harder to get, more people are having to make multiple searches, particularly those in the lower income bracket.

What's worrying is the long-term impact on borrowers. Lenders rely heavily on credit records in measuring the risk posed by borrowers, so the more blemished an individual's record, the more expensive the credit they will be offered. For those struggling to make ends meet, this can make all the difference between staying afloat and drowning in debt.

The other problem is that those aware of the damage that multiple searches can inflict on their credit records are inhibited from applying, or accept poor deals because they are reluctant to continue shopping around.

So what seems at first to be relatively trivial issue carries real significance for those applying for any kind of finance. What would help is a change of approach from credit card and loan providers, allowing people to obtain quotes without making full credit searches. They should also be obliged to make clear how each search can affect credit scores and how those credit scores can affect their chances of getting affordable loans, credit or mortgage finance in future.

THE upheaval in the way financial advice is given and paid for remains a couple of years off, but its impact is already being felt. The Financial Services Authority's retail distribution review, which outlines the roadmap for the advice revolution, is far-reaching. Particularly eye-catching is the proposal to ban the commission paid to advisers by the provider of products, which many believe compromises the integrity of the advice. Instead, advice will be fee-based and this shift is one of the reasons behind the acquisition last week of commission-based independent financial adviser Edward Jones by fee-based rival Towry Law.

More such deals are on the way, as advisers that operate a commission-only model anticipate a future in which fee-based advice becomes the dominant approach. Many will make the big change, but others will opt instead to sell. For the man in the street, the concern might be that not only will the number of IFAs fall, but also those that remain will serve an increasingly affluent client base more comfortable with a fee-model. Is the demise of commission a price worth paying?