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Barclaycard: more customers being refused credit

26th September 2007
By Karina Purang

Barclaycard has continued to turn away new applicants in a bid to reduce bad debt.

UK lenders continue to employ stringent lending policies as bad debt remains a major issue, with lenders such as Barclaycard cutting their credit limits and rejecting more applications. Moreover, with the ongoing credit crunch, many consumers will find that they no longer fit lenders' risk profiles, making it inevitable that it will only get harder for consumers to obtain credit.

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In 2006, a number of retail banks in the UK began adopting more stringent lending policies due to rising bad debt. As an indication of the issue, debt written off by banks rose from GBP3.9 billion in 2004 to GBP5.8 billion in 2005. Since then, debt written off has continued to escalate, reaching GBP6.7 billion in 2006. Of this figure, 98% was accounted for by unsecured lending, including credit cards and personal loans.

Indeed, high levels of personal debt and rising borrowing costs have meant that many British households have been unable to keep up with repayments and are now increasingly vulnerable to economic upsets and macroeconomic shocks.

The fact that Barclaycard has been turning down 55% of its credit card applications, up from its 50% threshold, reflects the noticeable change in lenders' attitudes towards consumer credit seen since 2006. This has involved an increased appetite for 'good quality' customers, a marked difference from their previous mass acquisition strategies.

Barclaycard has also introduced more rigorous checks on new customers and increased its credit card interest rates for its existing customers in fear of mounting bad debts. Similarly, Alliance & Leicester has tightened its credit scores and, in 2006, began turning down 60% of unsecured loan applications, as opposed to slightly over 50% previously.

It is not surprising that lenders continue to maintain rigorous lending strategies. Indeed, little has changed in 2007 as bad quality loans remain a major issue for the majority of lenders. To make matters worse, borrowing costs are higher than in 2006, with the base rate currently standing at 5.75%, compared to 5% in 2006. Moreover, with the ongoing credit crunch, many lenders have hiked their rates on their secured lending products.

Inevitably, an increasing number of customers will see their credit application rejected as they no longer fit lenders' risk profiles. After years of getting access to cheap credit and being chased by lenders, this may come as a shock to consumers. Indeed, in the current difficult situation, it will only become more difficult for them to obtain credit.
'End Intelliext

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