The End Of Cheap Credit: How To Survive It

The era of cheap credit could be over - for good. What steps can you take now to ensure you don't suffer later?

There's been yet another indication that the era of cheap credit may be over.

Hector Sants, chief executive of the Financial Services Authority, predicted today that the way banks lend to their customers is likely to change forever in the wake of the US sub-prime mortgage crisis and subsequent credit crunch.

This morning, he told BBC Radio 4's Today programme that banks would never again be able to raise large amounts of cheap money by packaging up and selling off their loans.

Instead, he argued, they will have to keep more of their loans - and the risks associated with them - on their own books.

This fundamental change in the approach to lending should encourage banks to get to know their customers better, and develop longer-term relationships with them -  the banking style of `the good old days'.

But such a return to more `responsible' behaviour on the part of the banks may not be welcomed by Britain's borrowers.

Lenders are now placing greater emphasis on keeping existing customers, rather than attracting new ones. This means they are competing less aggressively for new customers. This in turn means fewer cheap rates are likely to be offered to tempt you to switch lenders.

The combination of stricter lending criteria and the lack of competition by lenders means the cost of borrowing is likely to increase for all of us. It could well mean an era of more expensive mortgages, higher interest loans and more credit card rejections.

The new enthusiasm for responsible lending may be a good thing in the long run, but isn't it a case of closing the stable door when the horse is already several miles away? Many borrowers who were offered cheap rates on huge mortgages or large credit card balances may find that they're in real trouble when their current deals come to an end.

So what can you do about it?

Mortgages and loans: My Foolish colleague Donna Werbner recently highlighted how the credit crunch is affecting the mortgage market in her article, Death Of The Cheap Mortgage Deal.

As she explains, cheap mortgage deals are already becoming thinner on the ground, particularly for those people with smaller deposits or little equity in their property (10% or less of the total property value). Loans are also likely to become more expensive.

But don't panic. If you're worried about the rate you'll receive when you next re-mortgage, there are steps you can take now to minimise the damage.

For example, you should check with your lender whether it is possible to overpay your mortgage or loan without incurring any penalties.

If you can afford to do this now, when you are on a cheap, pre-credit crunch rate, it will mean you have a smaller debt burden to cope with when a higher rate does affect you. This strategy could also potentially save you thousands of pounds in interest payments.

Alternatively, if you are not allowed to overpay, you could try to save a certain amount every month as a sort of mortgage `buffer' fund. This would then absorb some of the blow when higher payments are required, and will also help you to get used to having higher outgoings should you be forced to take out a new deal with a higher rate.

If you do run into difficulties or think you will struggle once your current cheap rate ends, don't bury your head in the sand and hope the problem will go away. Speak to a whole-of-market broker three months before your current deal finishes to get professional advice on what you should do next. And speak to your existing lender before you switch - they may be able to help you manage your payments at an affordable level.

Credit cards: Now is the time to act to ensure you don't need so much credit in the future.

If you're able to wean yourself off those credit cards, you won't be at the mercy of the providers who are currently rejecting more and more applications for credit.

There are several steps you can take to get safely out of debt as quickly as possible.

Careful budgeting, cutting your outgoings, `snowballing' your debts and upping your income are all ways to get back into the black.

You should also consider transferring your balance a 0% interest credit card, so that all the money you pay every month goes towards getting rid of your debt, rather than paying interest to the lender.

Here's a step-by-step guide to battling the debt monster.

When all your debts are cleared, of course, you can breathe a deep sigh of relief and start saving. That way, you're really Foolish (note the capital F!), and will be well prepared if Hector Sant's predictions do come true.

More: Eight Ways To Be A Better Borrower

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