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High overdraft fee? You can challenge your credit score-based rate

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A number of banks have resumed overdraft charging and at a higher rate than pre-coronavirus levels. If your rate is based on your credit score, you can challenge it. Here’s how.

At the turn of the year, lenders announced new overdraft pricing to come into effect by April 2020 in response to an overhaul of charges implemented by the financial regulator.

As part of the Financial Conduct Authority’s rules, banks and building societies would no longer be able to charge customers higher prices for unarranged overdrafts in comparison to arranged overdrafts. Fixed daily or monthly charges as well as fees for having an overdraft facility were also banned in a bid to amend the ‘dysfunctional’ market.

While a seemingly positive move, the radical reforms resulted in lenders hiking arranged overdraft rates, with most setting their new rates at 39.9%.

But Lloyds Banking Group (including Halifax and Bank of Scotland), as well as digital challengers Monzo and Starling, announced customers would receive personalised overdraft rates based on their credit scores. The poorer the credit score, the higher rate customers would need to pay.

The majority of Lloyds group customers would pay 39.9% EAR (all accounts apart from Club Lloyds), some would pay 27.5% EAR (Club Lloyds) and some would pay a higher 49.9% EAR.

Monzo’s customers would pay 19% EAR, 29% EAR or 39% EAR (all variable), determined by their credit scores via TransUnion.

And for Starling customers, its ‘risk-based pricing’ meant customers going into an overdraft would face a 15% EAR, 25% EAR or 35% EAR interest rate depending on credit scores.

Given the coronavirus pandemic, lenders pushed back the imminent overdraft rate hikes and were instead told to offer customers a £500 interest-free overdraft buffer to help those who were struggling financially.

But now many have implemented the new overdraft pricing and faced with an overdraft rate of up to 50%, many are likely to continue to struggle due to the health crisis as credit scores may have been impacted.

However, you can challenge your credit score and therefore your overdraft rate.

How to challenge your credit score-based overdraft rate

Lloyds implemented the overdraft changes on 9 July and said 90% of customers would pay the same or less as a result of the changes.

Lloyds said exact details of its credit assessments for customers are “commercially sensitive”, but this would include information from Credit Reference Agencies alongside information provided by the customer at the point of application and information it may already hold.

It added that customers are clearly advised what their EAR will be prior to taking the overdraft.

“If they are unhappy with the price offered, they have the option to decline the overdraft,” a spokesperson added.  It works in the same way as if a customer applied for a credit card with a bank.

Monzo resumed its overdraft charging on 14 July and said 85% of customers would be better off under the new pricing.

In order to assess credit scores, it takes into account internal data as well as information from credit reference agency TransUnion. This determines the overdraft rate it offers to customers and the limit they can get.

Monzo Plus customers see their TransUnion credit score as part of their account benefits.

Customers can contact Monzo to discuss their options if their situation has changed recently.

Starling implemented the new overdraft pricing on 1 July but said customers can contact it to appeal their rate. It said it may not have the most up-to-date version of a customer’s credit file so with a customer’s consent, it will re-run the credit assessment. This may result in a different EAR.

It said it uses Equifax and TransUnion to assess a customer’s creditworthiness, adding that if someone has taken a coronavirus-related payment holiday for their overdraft, this won’t negatively affect their credit score when it comes to assessing the overdraft rate.

Sara Williams, founder of Debt Camel, said the new rates “kick people when they are down”, “aren’t transparent” and “are unfair”.

She said that when someone applies for a loan or credit card, lenders charge a higher rate of interest if the customer looks riskier but if they don’t like the rate, they can say no. The problem here is that the overdraft charges have been imposed on people who are already overdraft customers so money has already been loaned and with a poor credit score, it’s not as easy to switch accounts to a lender charging less.

Williams added: “The main point of the FCA changes was to make it easier for customers to compare overdraft costs across banks.

“But Lloyds, Monzo and Starling haven’t explained how they decide if someone has a good or bad credit record. Is an Experian score of 600 good enough? What if you have a great Experian score and poor Equifax credit score? Does it matter if all your defaults were paid off years ago? No-one knows.”

She said the only way to find out is to apply and see what rate you’re offered.

“That is hardly what the FCA had in mind and most people just won’t bother,” she said.

Williams also said in her blog post that information in credit records can be inaccurate and errors are hard to correct. For instance, people can find defaults or CCJs from years earlier that they knew nothing about, while lenders may apply different payment arrangements or default markers.

As such, she offers the following tips for customers if they can’t afford the new overdraft fees:

  • Complain to your lender and think about the outcome you want from the complaint.
  • Check your credit scores for free at Experian, Equifax and TransUnion if you are surprised to be told you have a bad credit score.
  • If you believe there’s something wrong with your credit score, ask the lender what the problem is and ask it to reduce the rate it applies to those who have an ok credit record.
  • If you’ll struggle to afford the higher rate rather than the lower rate, complain to the lender and state it’s unfair to charge you more as it’ll make it harder for you to clear the debt.
  • If you’re really struggling financially, you could ask for all interest and charges to be stopped, though this will affect your credit score.
  • If your lender rejects your complaint, take it to the Financial Ombudsman Service (FOS).

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Are Buy Now, Pay Later Apps Better Than a Credit Card?

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You might think BNPL saves you money and time, but it can cost you big if you’re not careful.

If you’ve noticed a lot more “buy now, pay later” apps popping up when you check out with online retailers, it’s because they’ve become increasingly popular.

This comes as no surprise when you consider how younger generations are hesitant to use credit cards. According to a new study on buy now, pay later (BNPL) apps done by The Ascent, 67% of millennials don’t have a credit card. For some, that’s because they can’t get approved, and others prefer to avoid credit. Many don’t think it makes sense to use a credit card for small, everyday purchases and are worried about the impact of credit cards on their credit scores.

Which one is better: BNPL apps or credit cards? The answer, as you might expect, is: It depends.

Better for ease of approval: Buy now, pay later

One of the main draws of BNPL apps is that they typically don’t require credit approval, and most don’t even involve a hard pull on your credit report.

This is good news for folks with bad credit or no credit at all, and it’s helpful for anyone who wants to keep credit inquiries to a minimum. Having multiple new inquiries on your credit report in a short period of time — and credit card applications are considered an inquiry — can cause your credit score to drop.

Shopping with an online retailer and paying with a BNPL app at checkout is certainly convenient. It means you don’t have to fill out a lengthy application and wait to see if you’re approved. However, just because it’s easy doesn’t mean it’s a wise choice.

Better for improving your credit score: Credit cards

Using a credit card regularly and paying it off in full and on time each month is one of the best ways to build credit. Of course, credit cards don’t inherently improve your credit — responsible credit card usage does. Late payments and delinquent accounts can completely wreck your credit score. And, as discussed above, the credit card application itself can ding your score slightly.

Many BNPL apps, on the other hand, don’t report on-time payments to the credit bureaus. This means you won’t get credit for them — pun intended. On the other hand, any failure to make your payments can be reported to the credit bureaus and damage your score.

Credit cards have the potential to either help or hurt your credit depending on how you use them. In contrast, a lot of BNPL apps only have the potential to drag down your score if you fail to pay off your balance.

Better for avoiding interest: It depends

Every BNPL option has its own set of terms and conditions, so it’s important to read the fine print before making a decision. Some come with an interest-free period, while others charge interest rates of up to 30%. You typically won’t be charged any fees to use a BNPL service if you take advantage of an interest-free promotion and pay off your full balance within the interest-free period and on time. That said, most of these services do charge late fees and returned payment fees if you don’t have sufficient funds in your bank account to make one of your scheduled payments.

The decision between a BNPL app and a credit card comes down to interest, so you should know the interest rate on your credit card. You can find that information on your monthly statement. If the BNPL app you’re considering charges interest, compare the rate to what your credit card would charge. In either case, you’ll likely pay a premium to put the purchase on credit, as the interest rates on credit cards and BNPL apps are extremely high.

Often, BNPL apps will offer an interest-free period, which is what can make them so enticing. A typical interest-free offer will break up the total cost of your purchase into four installments, asking you to pay 25% of the purchase price up-front and then make the remaining three payments every two weeks.

If you do this, you’ll have six weeks to pay off the purchase and won’t have to pay any interest. This makes it a slightly better deal than a credit card, which typically has a grace period of 21 days, or three weeks, before interest is assessed on a purchase.

However, if you miss a single payment or fail to pay off the full purchase by the end of the interest-free period, even if you only have a few dollars left to pay off, you could be in for a rude awakening. BNPL interest rates are typically far higher than those charged by credit cards. Some even charge what’s called “deferred interest,” meaning interest accumulates on the original purchase price, not the remaining balance. What’s more, some of these services charge late fees as a percentage of the original purchase value, which can be very costly.

In other words, BNPL services can save you money on interest, but they can also cost you a lot more if you’re not careful. They also give you a very short period of time to pay off your purchase interest-free, especially when compared to 0% intro APR credit cards with 18-month introductory periods.

Better for big purchases: Credit cards

Most BNPL apps are meant for smaller items — think a few hundred dollars — rather than major purchases. If you’re looking to finance something in the thousands of dollars range, you might have trouble finding a BNPL app that will help you out. Credit cards tend to come with higher credit limits, especially if you have good credit and a decent income.

That being said, financing an expensive purchase on a credit card is typically not a good idea either, due to the high interest rates. The only time you should consider putting a big-ticket item on credit is when you can take advantage of a good 0% intro APR credit card. Even then you need to be certain you can pay off the balance before the introductory period ends. Otherwise, you’ll end up getting slammed with massive interest fees.

Saving enough money to pay up-front is almost always the best way to pay

In most cases, the best way to pay for a purchase is to save up the money first and buy it outright. This ensures you’ll avoid interest fees, debt, and potential credit damage.

This isn’t always possible, but it is a best practice you should exercise for any non-essential purchases. Instead of swiping your credit card or using a BNPL app, open a free savings account specifically for that goal and transfer money into it once each week. Wait until you have enough money saved to buy the item you’ve had your eye on.

It won’t get you instant gratification, but it also won’t cause you to stress about making your payments or land you in debt. And that is priceless.

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It’s never too early to monitor your kid’s identity

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As children return to school, security experts want parents to add one more thing to their yearly checklist – safeguarding their child’s identity.

Monday is Child Identity Theft Awareness Day.

“This is a huge problem that frankly no one is aware of if they’re not paying attention to it, because it feels like an adult crime and it couldn’t possibly happen to a child, but it does,” said Eva Velasquez, President and CEO of Identity Theft Resource Center.

Recent studies show over 1 million children are impacted each year, with losses over $2.6 billion.

This year, new government programs for COVID-19 relief have created new vulnerabilities.

Children are prime targets because thieves can use their credentials to build credit history over time, then take out loans, open credit cards and max them out.

It can take months or even years for parents to realize their kids now have bad credit.

“The detection methods adults use just by engaging in the outside world, those aren’t there for children and the thieves realize that and they know it can go undetected for long periods of time,” said Velasquez.

The center says it’s never too early to start monitoring your child’s identity.

Teach them cyber safety as they get older and watch for red flags.

If you get something in the mail for your kid that looks like it should be for adult, don’t write it off as a mistake.

The biggest recommendation is to freeze your child’s credit. It won’t solve everything, but it will significantly lower risks.

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4 Signs of a Online Loan Scam

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Over the years, complaints about online loan scams are fortunately decreasing, thanks to warnings about loan scams and more reputable online lenders surfacing nowadays. However, even though the number of people getting scammed is steadily decreasing, the amount of money these scams are getting is still massive.

A report made by the Federal Trade Commission stated that consumers had lost about $905 million back in 2017, which is significantly higher than 2016’s $63 million. The FTC has made general guidelines about online scams through credited education, awareness programs, and even enforcement. However, even with all that, consumers are still losing millions through these fraudulent activities.

Typically, financial scammers primarily prey on people who have been previously denied a loan and desperately need money. For people like them, the need to borrow money is stronger than the urge to be vigilant about the loan they are applying for, making them easy prey for online loan scams. Even then, we need to be vigilant. That said, here are some signs you should watch out for to see if you are applying for an online loan scam.

No Credit Check

Now, don’t get us wrong. Not all lenders who don’t look at your credit history are scammers. Some alternative lenders are more interested in your income or profits (if you are running a business) rather than your credit history or merely running online loans for people with bad credit.

However, that doesn’t mean that you don’t have to be vigilant when encountering a lender that doesn’t require a credit check. If you base your decision on whether it’s a scam or not, merely seeing if they do a credit check is wrong.

It is essential to take note that most reputable lenders do a credit check. This is important to them because it helps them determine if you are a risky borrower or not. On the other hand, fraudulent loans aren’t even interested if you can pay the loan. They relish the fact that the borrower can’t repay the debt to incur more fees and penalties upon the borrower.

Upfront Fees

Some lenders will make you pay money in advance before doing any service. This is a red flag. The lender will disguise these as application fees or introduction fees.

Some even disguise these fees as document fees for them to process your application. It’s like them saying you need to send them money first before sending you money for the loan, which is 100% a scam if you ask us.

It is important to remember that any penalties, application fees, and whatnot will be rolled into repayment, or the principal cost when you get approved for the loan.

Unregistered Lender in Your State

All personal loan companies or any financial companies must be registered to the state they operate in. Their registration must pass through the State Attorney General’s Office, which will help the state monitor its businesses. This is applicable even if they operate online.

Online loan scams will typically say they are out of the state’s reach because they are online or a foreign company, which is what a scammer would say. If they operate outside of the state laws, they might be lending money illegally, or it’s an outright scam. When you find one, you can report them to the authorities to prevent these lenders from scamming other people.

If you aren’t sure whether they are legal, you can always check the State Attorney General’s Office if there are some complaints made about them. This might take time, but remember, we are talking about your money here. What is a week of waiting compared to you losing money over a scam?

They Demand a Credit Card

Under no circumstances will a lender or any other legitimate financial institutions demand your credit card or a photocopy of your credit card. If a lender asks for your credit card, it is a scam. They will typically say it is for insurance or some other excuse.

Legitimate financial companies will ask for a payment for the credit report, appraisal, or application, but those charges will be forwarded to your loan, not to your credit card. This is a popular way for scammers to get your money since credit from your credit card is virtually untraceable by the authorities. You also can’t report it to them because you voluntarily gave it to the scammers.

Remember to never give away your credit card or your credit card information to anybody, no matter how legitimate they sound or for any purposes. Doing so will rack you up tons of debt that you may never pay for for the rest of your life.

Takeaway

Online loan scams are still prevalent, even though the cases are steadily decreasing over time. Always be vigilant, especially if your money is at stake. Never give these scammers a chance to get any of your info, no matter how insignificant it is, especially your credit card information. Keep safe.

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