Overstretched? Break free from a debt dungeon

As Britons sink into the red, Sam Dunn shows how to avoid financial torture and rebuild your credit history
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The Independent Online

Consumers with poor credit histories usually struggle to borrow more money. The only way to get round the problem is to pay extortionate rates of interest.

Leaflets from credit card company Vanquis, part of the Provident Financial group, are currently being dropped through letterboxes. Vanquis is touting its plastic as a way to shake off debt and rebuild a damaged credit history. But its customers pay for the privilege - interest rates on the cards are as high as 58.5 per cent.

Vanquis spokesman David Stevenson argues that it operates a fair system because it grants bigger loans at lower rates of interest to customers it regards as a good risk. The highest rates of interest apply only to the smallest loans of £100.

Vanquis targets mainly low-income households but its leaflets have recently been sent to professionals such as teachers, doctors and engineers. This shift in focus is a response to rising levels of debt across all income groups. Excluding mortgages, the average UK household is now £6,800 in the red. With the Bank of England base rate on the rise, pushing up the cost of mortgages and personal loans, more people than ever are in danger of overstretching their finances and harming their credit rating.

The Consumer Credit Counselling Service (CCCS) last year received 125,000 calls asking for advice on debt, up by a quarter from 2002.

"People can suddenly find themselves in very different and difficult circumstances," says Frances Walker, spokes-woman for the CCCS. A bad credit history can creep up on anyone, she adds, not just those who regularly miss payments or can't hold down a job. Redundancy, bereavement or divorce can upset years of steady financial arrangements.

"If you have ever taken out a loan, credit card, mobile phone contract, bank overdraft, hire purchase or store credit, you will have a record," says Dan Levene, spokesman for Citizens Advice.

When we apply for a loan, the lender checks the records held by consumer credit information agencies, such as Experian and Equifax, which keep track of all our transactions. They know when we miss credit card payments, what county court judgments (CCJs) we have against us for non-payment of goods, and whether we have been declared bankrupt. Late payment of bills remains on your file for three years; CCJs and bankruptcies are recorded for six.

If your loan application is turned down, you should make sure that you have not been unfairly classified as a bad credit risk. "There could be misreporting on your file or somebody else might have stolen your credit details from receipts," warns Mr Levene.

Contact Experian or Equifax to check the information on your credit file. Ask for any errors to be changed.

Even if you have a history of late repayment, many lenders will still consider extending credit to you, though at the cost of a higher rate of interest. As long as you make your repayments on time each month, you should be able to rebuild a healthy credit history, and pay less interest in future. Shop around for the best rates - just as you would with any loan - and be careful not to make too many credit applications since they will show up on your records.

Capital One's Classic Mastercard is aimed at those who want to strengthen their credit history. It offers credit of between £200 and £2,500, with no annual fee. The initial annual percentage rate (APR) is high at 29.9 but is reduced once you build up a steady payment record.

The insurer More Th>n will consider anyone with a poor credit history, although rates are far higher than its usual APR of 13.9. It won't accept applications if you have a CCJ or are bankrupt.

Citigroup's Classic Plus Visa card charges a basic 21.9 APR and offers up to £3,000 credit with 0 per cent interest on balance transfers for the first three months. If you don't match its credit score for this card, it has others at higher APRs.

To see your credit files, send a cheque for £2 to Experian, PO Box 8000, Nottingham NG1 5GX, or Equifax at Credit File Advice Centre, PO Box 1140, Bradford BD1 5US.

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