You may have seen the news recently that Barclaycard has cut the credit limits for hundreds of thousands of customers, and there’s a good chance that you have customers who are affected.
Barclaycard is not alone in reducing credit limits in recent months. According to credit-checking firm, ClearScore, the average UK credit limit fell by 49% from January to December last year.
Of course, managing the amount of spending power available to customers, particularly at a time when incomes are threatened, is a responsible thing to do. Still, it can also create a headache for customers.
Many people use the rolling credit available to them to help them budget through peaks and troughs of cashflow and to help spread the costs of large expenditure items. A sudden and significant change to the amount of available credit they can access is likely to act as a shock. It will undoubtedly make many people sit up and review how they manage their finances on an ongoing basis.
If you have customers in this situation, particularly those who no longer have much headroom in the credit card debt available to them, one way of helping them is by raising capital with a remortgage, or second charge mortgage, for debt consolidation. By doing so, they can rearrange their finances, manage their debt more effectively and give themselves a bit of breathing space.
Obviously, there are considerations in converting an unsecured debt into one that is secured on their property, but in the right circumstances, debt consolidation can help customers to lower their monthly repayments and ultimately lower their overall levels of debt. In cases where their credit card credit limits have been reduced, it can also provide additional capacity to better manage their finances on a day-to-day basis.
A common hurdle in the way to debt consolidation for many customers is affordability. All lenders are obligated to apply creditworthiness and affordability check, ensuring that any plan is sustainable over the contractual term and some lenders will apply a maximum debt to income ratio, even if the debt is to be repaid using the capital raised.
However, there are lenders, including Pepper Money, that take steps to ensure that funds are used for the intended purposes and this means they are able to assess affordability based on the customer’s circumstances after the consolidation has taken place. If a credit card balance, for example, is being cleared with the funds, a broker should include this in the outgoings when submitting a decision in principle but should also tick the box to say that the balance will be cleared when funds are released.
At Pepper Money, we have helped thousands of customers who have wanted to consolidate their debts. We find that our approach with not credit scoring, not having a debt-to-income ratio, and not including missed credit card payments within our tiered product criteria all prove helpful for advisers in finding the right match for their customers.
So, why not ask your customers if they have recently received a letter about a reduction to their credit card limit? This may be something they are worrying about silently, and they may not know that you could be able to help. Taking the initiative and being proactive can help to demonstrate your value as an adviser and strengthen your relationship with them.
Paul Adams is sales director at Pepper Money
