How to Beat the New Year Credit Challenge

23-Dec-2009

If the phrase "New Year, new you" makes you want to crawl back under the duvet, it's time to wake up and smell the coffee - especially if you're planning to use credit to fund your lifestyle.

Cars, homes and even the weekly groceries are set to get more expensive, while borrowing criteria become increasingly tough as the recession bites.

Here are five financial challenges you could face - and some simple tips for tackling them.

Finding it harder to obtain credit

There's less money available to lend and great concern within both government and lenders about people building up amounts of debt that they are unable to pay back. As a result, credit is increasingly hard to get unless you have an excellent credit rating.

* Get to know your credit report - the history of your credit accounts, from cards and loans to catalogue and mobile phone contracts, plus your repayment record. Lenders read it when they assess whether you would be a good borrower, so it's important to ensure that it's up-to-date and accurately reflects your circumstances. Check your credit report is in good health with a free 30-day trial of CreditExpert.
* Look for errors and ask the relevant lender to amend them - for example an incorrect address could affect your credit rating.
* If special circumstances, such as a major illness, were at the root cause of past payment problems, ask to add a note of explanation to your report.

The VAT rate goes back up to 17.5%

New Year's Day sees VAT return to its normal 17.5 per cent level - which means an extra 2.5 per cent on almost everything you buy. It's a minor annoyance when you add more than two pence to every pound you spend on everyday items, such as a take-away coffee or a bar of chocolate, but if you?re planning to buy major items such as a cooker or a sofa, it can really hurt.

* Review your budget and increase the amount you allow for basics such as clothes and dry cleaning - almost everything except kids' outfits and non-luxury food will go up.
* Research the best interest-free or low-interest credit deals on major items carefully before applying. Do not go for every deal in the hope that one lender will say yes, because your credit report will record all of these applications. These can make other lenders nervous that you're overstretched, desperate or even planning a fraud - and that?s bad news for your credit status.
* If you ever go into the red at your bank, get an overdraft limit approved - you'll pay far less interest than on unauthorised overspending and you'll protect your credit rating.

Cars will get more expensive

The government's scrappage deal - which subsidised people swapping an elderly car for a new, more efficient one - is ending and a new showroom tax will increase the duty that you will have to pay on nearly all car models. On top of that, fuel duty will rise by one per cent above inflation from 1 April. It may not be a good time to need a car - but you can still get around.

* Do you really need your own car? A car share, car pool service, public transport and occasional car hire can make a cost-effective alternative. Ask friends and family if you can club together, see if you can share transport with work colleagues and be honest with yourself - a car may be nice but it's often not essential.
* Shop around for car finance, and don't assume that the garage's own finance deal will always be best value. Apply to speak to a car loan adviser through the SimplyFinance website, check price comparison websites and investigate a personal loan from your own bank too - but be aware that you?ll need a great credit rating to qualify.
* Take simple steps to boost your credit score. For example, register to vote at your current address, as lenders use the electoral roll to check that you live where you say you do.

Stamp duty returns for first-time buyer properties

The stamp duty holiday on homes worth between £125,000 and £175,000 is coming to an end and adding an extra one per cent to what you actually pay - that's £1,250-£1,750 more you have to find. But the bigger problem is building up a sufficiently large deposit to qualify for a mortgage in the first place.

* Save every penny and see if your family can help you out with a deposit - it's becoming the norm, now that many mortgages aren't available unless you can put up around a third of the purchase price.
* Boost your credit rating by closing unused accounts, challenging entries in your credit report that you disagree with, making all your repayments on time and resisting the temptation to open new credit accounts unless you really need them. You'll get an overview of what you can do when you check your free Experian credit report.
* Order your Experian Credit Score for just £5.95. It will give an indication of how lenders might regard you and will show the impact your credit history has on your credit rating.  Find out more about your credit score.

Credit card repayments will soon be rising

There are concerns that too many people are making the minimum repayments on their monthly credit card bills, which means that even relatively small amounts of borrowing could take decades to clear. As a result, many card providers are set to increase minimum monthly payments.

* Never skip a repayment or pay less than the minimum amount. You could incur penalty charges and fees and, because you've broken your agreement with the credit card or loan company, you might have to pay higher interest in future. On top of that, your missed payment will remain on your credit report for six years, warning other lenders that you may not be a reliable borrower.
* Talk to your card issuer if you think you may have problems making repayments. You may be able to reschedule your payments or take a temporary payment holiday.
* If you're worried that you're in a real financial mess, get debt advice. Reputable organisations include Citizens Advice at www.adviceguide.org.uk, National Debtline at www.nationaldebtline.co.uk or the Consumer Credit Counselling Service at www.cccs.co.uk, or apply to receive a callback from an experienced debt adviser through the SimplyFinance website.