How to turn yourself into a model borrower

Published 14th Oct 2008

As lenders play hard to get, give your credit rating a facelift to qualify for the best deals


How easy life used to be. Need to raise money? Take out a loan. Fancy a second home in the country and need a mortgage? No problem. Not any more. The global financial crisis has brought an abrupt end to the days of cheap credit.

Banks and insurers, once so free with their money, are being increasingly cautious. Tim Moss, of the comparison website Moneysupermarket.com, says: “Soon you are going to need a spotless credit record simply to have a paper delivered to your door.”

Only the most attractive customers can now be assured of the best deals. But how do you make sure that you have a face that fits? Here are some beauty tips.


Hundreds of deals have vanished over recent months because of the continuing turbulence in the banking sector. To make matters worse, lenders are asking for bigger deposits for the best loans and subjecting customers to more stringent income checks as they become increasingly picky.

To get on the property ladder, first-time buyers now need to put together a deposit of at least 10 per cent, but that will not give you access to the best rates on the market and your choice of lenders will be limited.

The cheapest rates are now reserved for mortgages with a maximum loan-to-value (LTV) ratio of 60 per cent. Britannia Building Society, for example, is offering the cheapest two-year fix on a 90 per cent LTV, with a rate of 6.14 per cent and a fee of £999. On a £150,000 repayment mortgage, a borrower on this deal would pay back £24,800 over two years, including the fee. With a 60 per cent LTV, Britannia's rate drops to 5.54 per cent with a £999 fee. Repayments would total £23,451.

David Hollingworth, of L&C Mortgages, the broker, says: “If you have savings marked for your mortgage, now is the time to use them. If you are planning to remortgage and have the capacity to reduce the size of your mortgage, you are a less risky bet in the eyes of the lender and can also qualify for lower rates.”

Mr Hollingworth also advises those who are remortgaging to be realistic about property valuations. If you overstate how much the property is worth, there is a high chance that your remortgage application will be rejected when the lender performs its own valuation.

Any non-standard circumstances could also make it more difficult to secure the best deals - including, for example, being self-employed or recently divorced.

Lenders are also imposing tighter conditions on buyers of new-build properties because of an oversupply of poor-value homes. Many lenders now require a minimum deposit of 25 per cent, compared with 15 per cent during the boom years.

Credit cards and loans

The number of consumers having their credit card and loan applications turned down is rising and lenders have cautioned that they face being squeezed further in the build-up to Christmas.

If you are rejected, it is worth checking that there are no errors on your credit file. Mr Moss says: “Forget the iPhone, the must-have accessory this year is a great credit rating.”

You can apply directly to any of the credit reference agencies - Equifax, Experian and Callcredit - to check your file. Each report costs £2. Alternatively, Checkmyfile.com gives you unlimited access to your reports from all three for £16.95 a quarter.

If you find an error on your report, you should write to the credit agency immediately, saying what it is you want to change and providing supporting evidence if it is available. The agency will flag this item as “disputed” and consult the company that provided the information. Credit reference agencies suggest adding a “notice of correction” to your file if there are details that are worthy of an explanation. Lenders are legally bound to look at these notices.

Neil Munroe, of Equifax, says: “Make sure that you are on the electoral roll, and if you have credit or store cards that you never use, close the accounts. Not only will this mean that you have less outstanding debt, but it also shows that you can settle accounts.”

Try to avoid being rejected repeatedly. A “footprint” describes the mark left on your file every time that it is viewed by a company. It lets you know who is checking your file, but it also gives the bank an idea of how often you are applying for credit. Too many footprints may set alarm bells ringing.

Missing a bill payment will have a detrimental affect on your credit file. If you think that you might not be able to make a payment, stop the direct debit and call the company involved. If you can arrange to pay the bill later, it may not be recorded on your credit file.

If you already have a card, do not assume that your problems are over. Card companies often expect borrowers coming to the end of a 0 per cent introductory offer to accept a standard rate much higher than that quoted when they took out the deal.

Barclaycard, for example, has recently increased its purchase rate from 15.9 per cent to 16.9 per cent. Capital One has raised its rate from 12.9 per cent to 15.9 per cent.

Mr Moss says: “Many will leave the rate on hold if you phone and complain. All cardholders should keep a close eye on their rates and not hesitate to dispute outrageous increases.”

Drive down the cost of car insurance

Motorists face record premiums for car insurance as the financial turmoil bites. The average cost of comprehensive cover has topped £700 for the first time, according to the AA, the motoring organisation, and the upward trend is expected to continue.

But were you aware that how you describe your job can save you hundreds of pounds? Insurers set their prices based on the claims experience for different job descriptions: more claims equal more risk and higher premiums. Testing different descriptions of your job on quotation forms at insurance and comparison websites can legitimately cut quoted prices.

Will Thomas, head of car insurance at Confused.com, the comparison website, calls the practice “quote massaging” and advises buyers to try it when they come to renew their policies. He says: “You must not be dishonest, but many jobs fit a number of accurate descriptions.”

At Confused.com, which compares quotes from a range of insurance providers, a 30-year-old “delivery driver” based in Glasgow is quoted a premium of £467.25 by Broker King for cover on a Fiat Brava, while an identical “courier driver” would have to pay £499.91.

Small differences in a car's mileage also affect the price of cover. Prices tend to change on, or just below, the 1,000-mile marks. So a driver who enters mileage of 19,950 miles a year pays less than one who gives a figure of 20,000 miles. Drivers are expected to make an honest estimate of mileage - you should not underestimate - but rounding up to the nearest thousand miles could be a costly mistake.

Postcode pensions look here to stay

The amount that you receive from your pension at retirement could soon be judged on where you live. Norwich Union became the latest insurer to use customers' postcodes to decide on annuity income in retirement after similar moves by Prudential and Legal & General.

Tom McPhail, of Hargreaves Lansdown, the independent financial adviser, says: “The three largest insurers are now using postcodes and it is only a matter of time before others decide to do the same.”

Annuities are a type of investment bought with pension savings to pay an income for life. Under the new system, pensioners in more affluent areas will receive a smaller annual income for the same pot of money than counterparts in more deprived areas. This is because people in leafier postcodes are expected to live longer. A pensioner's overall payment should, in theory, be the same as that in more deprived postcodes. People in less affluent ares should receive fewer but larger annual payments because of the shorter life expectancy.

The result will be lower annual payments for people living in wealthy areas in the South East, such as Kensington and Chelsea, in London; the South West, such as East Dorset; and the East of England, such as South Norfolk.

Pensioners based in postcodes that have the lowest life expectancy in Scotland, the North East and North West - including Glasgow, Manchester and Blackpool - will benefit from higher annual payments.

Case Study: Mortgage in the pink after forsaking the suntan

Philomena Geraghty, a hairdressing teacher from Lincoln, faced a large increase in her monthly costs when her mortgage deal expired. The 33-year-old, who was paying £460 a month on her £82,000 home loan, did not have enough equity in the property to qualify for the best deals.

But by cutting back on luxuries, Ms Geraghty, left, managed to save £15,000 over 24 months, which she used to pay off a chunk of her mortgage. “I had to save like mad, but it was worth it,” she says. “I haven't been on holiday for two years, but I would rather know my house is safe than sun myself on a beach. A tan always fades, but a big mortgage takes longer to shift.”

Ms Geraghty approached L&C, the mortgage broker, which found her a fixed-rate deal of 6.38 per cent from Nationwide Building Society, reducing her monthly repayments to £410.

David Hollingworth, of L&C, says: “If Ms Geraghty had not made that capital repayment, the best rate available would have been 6.78 per cent, which would have increased her monthly repayments to £523.”

Source: ' times '

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