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Spend & Save

Money Insider: Put your credit rating back on track with the help of good old-fashioned banking

It seems that barely a day passes without a bank or building society launching a new super-low-rate loan, an interest-free credit card or a cheap overdraft. However tempting this seemingly never-ending supply of low-cost finance may sound, the reality is that unless you have a pristine credit record you'll have little or no chance of being accepted for any of it. Whilst the tightening of lending policy will protect the bottom line for providers, the flip side is that a rapidly increasing number of people are now finding themselves excluded from mainstream credit.

Until now this has driven people to borrow from doorstep lenders, payday loans providers and loan sharks and paying interest of anything between 200 per cent and 2000 per cent-plus APR for the privilege.

Last week however there was at long last a glimmer of light when the Government announced details of a new initiative, aimed at providing an alternative source of affordable credit to people who can no longer borrow from the high street banks.

The scheme, run in association with the National Housing Federation and Royal Bank of Scotland, will start out as a pilot at 10 branches across the West Midlands. It will give people a genuine opportunity to get their finances back on track and repair their credit history in the process.

My Home Finance will not be a soft touch and applicants will have to undertake a 45-minute face-to-face interview to review their financial position in detail and to ascertain whether they have the capability to repay any credit advanced to them.

It is a move back to a time when your local bank's lending officer would sit down with you and discuss your application in depth, long before the days of automated scorecards and an instant computer-generated yes or no. Banks moved away from this individual assessment-style lending approach and have long since adopted automated and centralised functions in order to reduce costs.

The interest rates of 29.9 per cent APR and sometimes higher reflect the high administrative costs due to the in-depth customer appraisal and monitoring weekly repayments, plus it no doubt takes into account the possibility of higher than average defaults and write-offs. However, as this is a not-for-profit lending scheme it can afford to absorb the extra costs rather than having to account to shareholders seeking increased profits.

The My Home Finance initiative is a cheaper and more attractive alternative to payday loans and unregulated loan sharks where the interest costs can prove crippling, particularly for those already operating on tight budgets.

Let's hope this scheme proves to be a success and is rolled out on a wider basis, because the ultra-tight risk policies currently being applied by banks means huge swathes of people are no longer able to borrow from our high street lenders.

Halifax's new ISA

Most of the activity surrounding tax-free savings takes place at the beginning of the tax year, so it came as a bit of a surprise when Halifax launched its latest ISA last week.

This new variable rate ISA pays a market-leading 2.8 per cent plus an extra 0.2 per cent for Halifax current account customers. The account is opened with just £1, offers unlimited penalty-free access and is available online, by phone and unlike many best-buy products, in branch too. You'll need to review your account when the rate drops away after 12 months, but in the meantime this account should be the first port of call for any saver without an ISA. For a basic rate taxpayer to achieve 2.8 per cent net on a standard savings account they would need to find a gross rate of 3.50 per cent and that's simply not possible at present.

In the mortgage sector there has been further best buy action, including better news for first-time buyers. The Coventry Building Society hits the top spot with a new three-year fix priced at 3.59 per cent to 65 per cent LTV with a booking fee of just £199. For first-time buyers, the Co-operative bank and Britannia have trimmed the rate on 10-year fixed rates where you can lock in at 5.09 per cent with a £999 fee or a 5.29 per cent no-fee option, both up to 90 per cent LTV.

The credit card market continues to throw up great deals for those with a tip-top credit rating. This week MBNA launched two new market leaders. Firstly a 16-month 0 per cent balance transfer deal with 2.9 per cent fee, plus a 0 per cent dual offer on both balance transfers and purchases. The latter could prove a winner with Christmas around the corner.

Andrew Hagger is a money analyst at Moneynet.co.uk