Consumers shouldn't be punished for trying to find cheap credit deals

We must reform the system that punishes consumers who seek the best card and loan deals, says Sam Dunn. 

A novel way to buy a car

Pick a dealership you like the look of – perhaps it’s one you’ve used before – and run an eye over the models.

When you’ve decided which one you like, ask the salesman if he thinks you should be allowed to drive it or not.

To your dismay he says: “Sorry sir, the answer’s no; but have you thought about this more expensive make instead?”

Twisted, eh? But there’s more.

Unwilling to pay more for a vehicle you really don’t want and can’t afford, you decide to visit rival dealerships.

The same process happens again but each time you visit a new forecourt, the staff are fully armed with the knowledge of where you’ve been before – and the decisions the other dealerships have made.

You’re caught in a trap, entirely at the whim of profit-hungry companies.

The credit trap

My car analogy sounds like a pretty bizarre way to make a major financial commitment but unfortunately it’s one already in practice – when we apply for credit cards and loans.

Frankly, it’s a ludicrous system that would be funny if the consequences weren’t so severe. When you apply for a particular loan or credit card, the very act prompts a “search” entry to pop up on your credit file.

This has an immediate effect on your credit score: positive if you’re successful, negative if you’re turned down.

If it’s the latter, now the nasty part starts. Say you apply for a 0 per cent balance transfer card but your bank tells you that actually a 14 per cent interest card is the best you can get – understandably, you decline.

Yet your ability to then shop around for a cheaper card deal from a rival lender is compromised because of the very act of your first application – regardless of what the offer was.

A vicious circle

Or say you want a credit card offering cashback but your lender can only manage to offer you one without and you refuse – again, the very application taints any future chance of success.

And there’s the rub: too many rejected credit search applications, particularly in a short space of time, can catapult you into a vicious circle.

This is because multiple searches leave imprints on your file and can ruin your credit score as lenders may consider your behaviour as desperate, a sign of over-commitment to debt, or even fraudulent, and rate you accordingly.

Worse, people are lured in by lax marketing laws made more lax by a recent EU ruling that lets card companies advertise headline-grabbing, dirt-cheap “typical rates” as long as 51 per cent of applicants get them - it used to be 66 per cent.

So say if 1,000 people apply for a cheap seven per cent loan, only 510 must qualify: this means 490 go away with a marked card to begin the process all over again.

Each application is essentially a gamble, leaving only the lenders as the real winners.

A better solution

In theory, there’s a way out of this: the “quotation search”.

Instead of an application search which marks your credit files, this type leaves no trace and lets you compare credit cards or loans without fear of further damage.

However, this option is still largely ignored by lenders because, as well as being expensive for them, there’s a much greater risk you’ll simply go elsewhere for a better deal.

The banks should be forced to allow quotation searches, but as yet they don’t have to.

The Treasury Select Committee examined this issue but decided it wasn’t grave enough to warrant any drastic change. That's a poor decision given how expensive credit is today, with many households struggling to find the best deal to help them manage their personal finances.

It’s left price comparison sites such as Confused.com to fill the gap with a service that can help you avoid constant rejection by giving you an indication of the type of card you can apply for and your likely success rate. Find out more about Card Matcher. 

But the fact that cosumers continue to be punished for trying to find the best deal is an utter nonsense Treasury Select Committee, and has no place in consumer-friendly Britain.

Comments

[Credit Risk Management]

Thought provoking post. You made some interesting points about the adverts and the new EU laws in the 'vicious circle' section. Would be interesting to see how things will evolve if ever the solutions you proposed (or similar ones) get approved.

[Mandurah Real Estate]

I think the best thing to do is don’t spend more than you earn. I have always believed in spending less than I earn. This means I don’t take loans and never find my self in a situation where my monthly income finishes before the month does. If I need something and can’t afford it, I will first raise my value enough to buy it.

[Justin Bieber Shoes]

Hi ,thanks for this post.
******The job market is constantly moving and growing and if HR professionals are not on top of this movement they and their company can be doomed. As second city alum and HR professional, I've always advocated for basic improv training not just in hr, but for all professionals in general.

[loan modification attorney]

There needs to be proper regulation when it comes to dealing with debt. Credit deals are the consumer's available choice.

[Financial advisor perth]

Although the rules for the use of quotation searches were agreed between the Information Commissioner’s Office, the FSA, the CML and the credit reference agencies, it is still impossible to confirm whether companies are really using the system.