Credit crunch: Life just got harder for those who have to borrow to buy

First it was applicants for mortgages, now it's high-street and mail-order shoppers being put through strict new lending tests. By Esther Shaw
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The Independent Online

Consumers looking to sign up to mobile phone contracts, open a store card account or even buy from mail order catalogues could find they are knocked back as a result of the credit crunch.

Equifax, the credit reference agency, says the current turmoil in the money markets could affect anyone making a purchase that requires a credit check – not just those taking out a mortgage or personal loan.

"We have already heard how high street lenders are cutting credit limits and putting up interest rates, but this also applies to the smaller credit lenders," says Neil Munroe, spokesman for Equifax.

James Jones from Experian, another credit reference agency, says that companies selling anything from mortgages to mobiles are all now reviewing their lending policies.

"Credit providers use a 'credit scoring' system based on an individual's credit history to calculate risk and to decide whether to lend," says Mr Jones. "They are now only granting credit to those with the best scores."

Mr Munroe points out that companies requiring a credit check know that as people start to struggle to keep up their repayments, they will be hit first: "People will prioritise their payments, starting with their mortgage, while mobile phones, catalogues and store cards come lower down the pecking order."

Credit risk professionals at these smaller lenders, he adds, are on the look-out for the early signs of bad debt.

"The impact of the credit crunch is not only affecting the first line of finance but now also the second line, such as phone companies, store cards and mail order," says Tim Moss at the price comparison website Moneysupermarket.com. "We are seeing the belt-tightening by [major] lenders filtering through into other products."

For example, in the past, if you wanted to take out a mobile phone, you simply had to provide a utility bill as proof of address and would undergo a "light" credit check that would not leave a "footprint" on your credit record. But phone networks now go over credit histories more thoroughly, explains Mr Moss.

"Some people are taking these expensive goods and not paying their bills, and phone providers are no longer prepared to risk losing up to £600 upfront on a new handset," he says. "As a result, more and more people are struggling to get through the credit check."

The application process for store cards, he adds, is getting stricter too. "Previously, if you wanted to take out a store card, you could do it there and then at the counter, but you now have to undergo a more thorough credit check."

Even catalogue firms are toughening up: "This is still quite a niche area that tends to support the lower end of the demographic scale – those who struggle to get mainstream credit," says Mr Munroe.

However, he points out that as phone companies, store card providers and catalogue firms do not provide a "solely financial" product, they do have to strike a balance between tightening lending criteria so as not to take on bad debt, and maintaining marketing and sales so people will go on spending money.

"What we are seeing is lenders tweaking the margins," says Mr Munroe. "In the past, they might have overlooked the odd missed payment here and there, but we are now finding that slight misdemeanours on your credit file can matter a lot more."

How to boost a credit score

* Ensure you are on the electoral role. This makes it easier for the lender to verify that you live at the address you have given.

* Close cards and accounts you no longer use. Lenders look at all credit available to you when deciding if you are overstretched.

* Make loan repayments on time and by direct debit. A history of meeting repayments will give lenders greater confidence in you.

* Check your credit score at least once a year for errors. Do this online with a credit reference agency. Go to www.equifax.co.uk or www.experian.co.uk.

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