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Last Updated: Thursday, 29 June 2006, 09:13 GMT 10:13 UK
How lenders make their decisions
MONEY TALK
By Sandra Quinn
Association of Payment Clearing Services (Apacs)

Sandra Quinn
Sandra Quinn says banks take care over who they lend to
The BBC News website's reader debt diary has examined the attitude of lenders to mum-to-be Sayara Beg's struggle with bad debt.

A banking industry expert explains how credit card providers make their lending decisions and deal with bad debts.

Credit cards give us greater flexibility about how and when we pay, access to short-term borrowing and peace of mind in emergencies.

They have become part of our daily lives - and it's important to remember that for vast majority of people the experience is problem-free. Six out of ten of us repay in full every month.

Nevertheless, the credit card industry takes the issue of indebtedness very seriously.

It is not in the industry's interests to lend money that cannot or will not be repaid, and we work hard to make sure clear information is available to customers highlighting the key features and costs of using a credit card.

As part of the credit card industry's commitment, all cases of financial difficulty are meant to be dealt with sympathetically and positively - for example, by helping a customer agree a new payment plan that they can afford.

READER DEBT DIARY
Sayara Beg

Credit card companies do not gain anything by having you default on your debt.

The golden rule is that if you are struggling with your debt, do not ignore it - seek help, either from your credit card issuer or from one of the many free debt advice agencies.

Sayara Beg's BBC debt diary provides a good example of an individual who has struggled with their debt and seems to be managing to bring things under control.

There are a lot of tools out there to help individuals - such as the BBC News Debt Test (see link on right-hand side of this page). Just make sure you do not ignore the problem.

Best practice

Before a lender gives you a credit card, or increases your credit limit on an existing card, they always assess your ability to repay what you borrow.

This includes at least two of the following checks:

  • Your income and other financial commitments
  • How you have handled credit in the past
  • Information held by a credit reference agency about you which will include your credit history
  • Credit scoring techniques.

Information sharing

The industry is committed to sharing as much data about customers as is legally possible, in order to assist with responsible lending.

The data shared includes all your existing credit relationships - mortgages, credit cards, personal loans, store cards, as well as how much credit you have available to you.

The industry is reviewing how it can expand the information on your credit record, so that as complete a picture as possible is available.

The bottom line is that the credit industry does not want to lend money that cannot be repaid - but the other side of responsible lending is responsible borrowing.

Recently, a summary box has been introduced on marketing material and credit card statements.

Summary boxes outline terms and conditions in plain English, and the length of time it will take to pay off debt if consumers make no more than the required minimum repayment.

Responsible lending

A counsellor at the consumer credit counselling service
Lenders fund some credit counselling services

The credit card industry is serious about responsible lending.

In fact, lenders turn down about a third of all credit card applications.

Lenders have to strike a difficult balance when taking policy decisions on lending: that they do not exclude sectors of society, or make credit too difficult to obtain for the vast majority who use credit cards and enjoy managing them to their advantage.

Many credit card issuers support access to money advice through contributions to the Money Advice Trust.

This provides education and support to improve the quality of face-to-face advice which customers receive through local advice services, including Citizens Advice.

They also contribute 35-40m each year for financial education initiatives.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.


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