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According to the Bank of England, BRITS will find it difficult to borrow via credit cards and personal loans.
The warning comes after loan rates hit a six-year high last month.
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Borrowing costs are also expected to rise further after the Bank of England (BoE) warned that interest rates could reach 6% next year.
Lenders told the BoE that the availability of credit cards and personal loans to households declined from July to September.
Experts say borrowing for ordinary households will become even more difficult in the coming months.
This means that those who are approved for new credit cards or personal loans are likely to face higher interest rates.
As banks tighten lending, the consequences can be very bad for those who cannot accept new credit cards and loans.
Some are forced to borrow money from the unregulated buy-now pay-later sector or through riskier and more costly payday lenders.
MoneyComms’ Andrew Hagger said:
“People who crave credit are likely to take higher payday loans and turn to loan sharks.”
People’s budgets are under pressure from the cost of living crisis, pushing people into riskier borrowing.
Hargreaves Lansdown’s Sarah Coles said:
“This could mean that many of them are behind on payments. It could also increase the types of borrowing they have access to. For example, buy now and pay later. such as paying with
But before committing to a new credit card for personal loans, it’s important to ask yourself if you actually need to borrow.
If you can’t afford to pay off your current debt, never borrow any more.
The news about borrowing affordability comes less than a month after the BoE raised interest rates by half a percentage point to 2.25% for the seventh consecutive time.
The central bank has raised interest rates to control rampant inflation, which currently stands at 9.9%.
However, banks typically pass interest rates on to their customers, so borrowing costs often rise when base interest rates rise.
This reduces people’s disposable income, reduces demand, slows price growth and lowers inflation.
But that means people face higher interest rates if they need to borrow money.
How will the spike in borrowing costs affect Britons?
With more people unable to access regulated credit cards and personal loans, many may be forced to borrow from riskier sources.
Some may resort to payday loans. This is usually offered to people who are struggling to stretch their cash until their next payment.
However, they are usually offered at high interest rates. Over a year or more, the average annual interest rate on a typical payday loan can be up to 1,500%, according to Money Helper.
Others may look to Buy Now Pay Later (BNPL). This allows individuals to borrow cash without undergoing a rigorous credit check in most cases.
BNPL is a form of borrowing that allows you to make purchases but delay payments.
It’s popular because shoppers can split the shipping costs in monthly installments and it’s interest-free.
Companies offering this service include Klarna, Clearpay and Laybuy.
BNPL is convenient, but it’s a liability after all.
Also, failure to pay on time can result in high late fees and marks on your credit file.
Frequent use of BNPL may also alert regulated lenders who believe they do not have sufficient funds to pay the full amount up front.
Especially now that BNPL purchases are starting to show up on people’s credit reports.
Buy now and pay later is also not regulated, so customers do not benefit from the same protections offered to credit card holders.
This includes the protection of purchasers as set out in Article 75 of the Consumer Credit Act.
This protection means that if you make a big purchase with your credit card and the item never arrives, or the store goes out of business, the card provider is just as responsible for the refund as the retailer. .
How have personal loan costs increased?
According to MoneyFacts, the average interest rate for individuals looking to borrow £3,000 over the next three years is 15.2%, compared with 14.3% last year.
Those looking to borrow £5,000 over three years face an average interest rate of 8.5% compared to 6.8% a year ago.
The average interest rate for the £7,500 loan tier is now 6.1%, compared to 4.4% in October 2021.
The average annual interest rate on the £10,000 loan tier is 6.1%, compared with 4.5% last year.
The numbers are averages and take into account the various interest rates available, so you can borrow at a lower or higher rate depending on your circumstances.
How have credit card interest rates changed?
According to MoneyFacts, the average rate for all types of credit cards, including fees, hits a record high of 29.8%.
The current average annual credit card rate is up from 25% in October 2020 and 26% in October 2021.
Again, the numbers are averages and take into account the variety of available rates, so rates could be higher or lower.
How can I reduce my borrowing costs?
The first thing a borrower can do is improve their credit score.
boost your credit score
To build a decent credit score, you need to be on the electoral rolls.
This proves who you are and where you live, and if you’re on the list, it’s easier to get credit.
It is also wise to check the electoral rolls for errors. You can sign up by registering to vote.
Do not apply for too many credits as it can be seen as a sign of a financial crisis. Each application is recorded in a file.
Use our ‘soft search’ eligibility calculator to show your chances of being accepted.
Late payments are also recorded on file, so always pay your bills.
Lenders may be reluctant to lend if you already have a lot of debt, so try reducing your existing debt before applying for new credit.
lighten the loan
If you took out the loan a few years ago, it may be worth looking for a better deal.
Using a new loan with a lower interest rate to pay off the old one makes sense in some cases.
However, keep in mind that rates advertised by lenders are reserved for those with a high credit rating, so this rate may not be available to everyone.
Use eligibility tools like Compare The Market and MoneySavingExpert.com to see which loans you are most likely to get without hurting your score.
Blitz your credit card balance
Don’t let your credit card debt linger. If you only pay the minimum amount each month, it could take decades to clear.
With a balance of £5,000 and just an average minimum monthly payment of 2.5%, it would take nearly 38 years to pay off at the normal interest rate of 22%, for a total cost of nearly £15,000.
Get interest free for up to 34 months when you switch to a balance transfer credit card.
Split your total debt into monthly payments and set up direct debits to ensure that your balance is cleared in that amount of time. If that is not possible, try switching to a new card again.
However, not everyone can get the best balance transfer deals as they require a good credit score.
Use Go Compare or Uwitch’s eligibility checker to see which card you are most likely to get.
Cancellation of overdraft fees
Overdrafts are one of the most expensive ways to borrow money. Some banks charge 40% interest. This is almost double the average credit card interest rate.
Go to a bank where overdraft is free. Remittance credit cards can give you interest-free grace to pay off large overdraft debt, but beware of high fees.
How can I get debt assistance?
Hargreaves Lansdown’s Sarah Coles said:
“Talk to debt charities like StepChange. will help you with everything.”
If you are in debt, there are many services available that offer free advice on how to manage your debt.
Most of them can provide free guidance and help in person, over the phone or online.
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