Loan Introducer

Debt consolidation can improve credit score

Matt Meecham

chief digital officer, Evolution Money

For borrowers in both the first- and second-charge mortgage markets, the need to present themselves in the best possible financial light has never been greater.

The increased cost of living, coupled with rising interest rates, have put affordability centre stage – but it’s also important we not forget.

Alongside affordability, applicants’ creditworthiness forms a vital part of their financial profile and, as such, can be the key to unlocking the best products and rates.

Just one missed payment on a mobile telephone bill can negatively affect borrowers’ credit scores and stay on their credit report for six years, and the more unsecured debt a borrower has, the more potential there is to miss a payment – something that doesn’t bode well in the current climate.

The latest money and credit figures from the Bank of England show borrowers are increasingly turning to unsecured debt. Individuals borrowed an additional £1.4bn in consumer credit in April this year, following £1.3bn of borrowing in March.

This is the third consecutive month in which borrowing has been higher than the 12-month pre-pandemic average, up to February 2020, of £1bn. The additional borrowing in April of consumer credit was split between £0.7bn on credit cards and £0.7bn through other forms of consumer credit – such as car dealership finance and personal loans.

The annual growth rate for all consumer credit increased to 5.7 per cent in April from 5.2 per cent in March – the highest rate since February 2020. The annual growth rate of credit card

borrowing was 11.6 per cent – the highest since November 2005 – and other forms of consumer credit went to 3.4 per cent, the highest since March 2020.

This is a huge amount of credit, and there is already evidence that some borrowers are struggling to manage their payments. Digital wealth manager Moneyfarm recently interviewed over 1,500 UK adults and found 31 per cent have struggled or failed to meet an essential financial commitment such as rent, mortgage, bills, loans, or a credit card payment in the last six months.

Its findings show 70 per cent of the nation currently carries some form of debt on a credit card or personal loan, with 35- to 50-year-old men holding the most – approximately £3,700. Furthermore, 25 per cent of those questioned had failed a hard credit check in the last six months when applying for a new product.

When it come to a borrower’s credit score, one of the best ways to maintain a good one is not to miss a credit, loan, or mortgage payment – something that becomes inherently harder the more lines of credit one has.

Taking out multiple loans and credit cards – especially in a short space of time – is not a good look when it comes to how an applicant is perceived by a credit agency, as it gives the impression they might be overreliant on credit. Even if a borrower is just applying for a small amount of credit, each application will leave an imprint on that borrower’s credit file.

Borrowers may not be aware of their credit score or the damage that missing a payment or taking out a lot of credit has done. A bad credit score could not only prohibit borrowers from taking out a financial product, but also cause them to pay a higher rate. Consolidating their debt and making their payments on time could improve their score if they have a history of missed payments.

A lot of borrowers’ finances have changed as a result of COVID, and for those with numerous credit cards and loans, debt consolidation could be a good longterm solution. While taking on more credit might offer a short-term fix to a borrower’s financial trouble, using a second-charge to consolidate their debt into one manageable payment could improve their long-term outlook and their credit score.

We are seeing continued demand for debt consolidation. Our latest second-charge tracker shows that between March and May this year, debt consolidation borrowers accounted for 69 per cent of our business by volume and 60 per cent by value.

COVID has already had a negative impact on the finances of many borrowers, and the rising cost of living risks doing the same. Now more than ever it is worth exploring debt consolidation options for those with multiple unsecured debts and, where possible, looking to boost their credit score by consolidating some of this debt. M I

Too-easy credit could be the next lending scandal

Tony Marshall

MD, Equifinance

According to a BBC report for Panorama, an estimated 15 million adults of all ages in the UK are actively using Buy Now, Pay Later (BNPL) facilities, an increase of more than two million since the start of the year. Also, research by Equifax suggests about 30 per cent of those are 20-to-30-year-olds.

For those people who keep up payments on schedule, BNPL can be a very convenient way to spread the cost of purchases without incurring any charges. However, the dangers of BNPL lie just below the surface and come in three ways. The first trap is not repaying the capital borrowed within the short interest-free period; secondly, if an option to extend the repayment period is taken up, interest charged can be north of 40 per cent or more in some cases. Also, some lenders may pass unpaid debts on to debt-collection agencies. Lastly, from the beginning of this month, BNPL borrowers with Swedish financial company Klarna, the leading BNPL provider in the UK, started sharing customer data with two credit agencies, Equifax and TransUnion, meaning all creditors and lenders will be able to see these debts when conducting formal checks on potential borrowers for mortgages and other finance.

This could have particular significance for would-be borrowers looking for mortgages, remortgages, or secondcharge loans who have outstanding BNPL loans, as their borrowing will be taken into account for credit and affordability purposes.

However, the bigger issue is highlighted by a Citizens Advice survey of 2,288 people who had used BNPL during the past 12 months. It found that while 52 per cent made repayments from their current account, 23 per cent were using a credit card, nine per cent a bank overdraft, and seven per cent were borrowing from friends and family. With the growth of the sector, these figures can only get worse as more people struggle to make repayments.

It is clear that if the growth of BNPL continues unchecked, we are looking at the potential for a massive growth in indebtedness among those least equipped to cope with the consequences. The FCA is consulting on how best to regulate the sector, but the number of people already opting for what seems an easy way to spread out payments with no interest charges means that it might be too little, too late.

What effect will this have on the second-charge market? As debt consolidation is a major staple in our sector, we can expect to see more cases from those fortunate enough to have a residence on which they can raise funding. However, along with further advances or remortgages, the increasing pressure to consolidate debt does not mean that lenders can afford to compromise on underwriting standards. Given the rises in the cost of living, along with the extra pressure of making repayments on existing credit, customers are going to find it more difficult to keep ahead.

Now more than ever, our responsibility as lenders is to approve second-charge loans when we’re confident that by doing so we are not simply pushing the debt issue down the road. I have always believed that the second-charge sector plays a vital role in helping customers get back on their feet, but even though a secondcharge debt consolidation loan can significantly reduce monthly outgoings and be thepositive catalyst for a better financial future for many, it still doesn’t receive the positive attention it should.

What BNPL is forcing us to consider is whether ‘easy’ borrowing, no matter how well packaged, can ever be launched without regulatory oversight from the beginning. Whilst I have always been a supporter of a free market economy, it is clear that where personal finance is concerned, especially borrowing, we need to make sure that borrowing of any kind is subject to the same checks and balances, whether for a mortgage or a short-term finance deal like BNPL. M I