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The ‘generous’ bank gestures that can backfire

Paloma Kubiak
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Paloma Kubiak

You may think your bank is being nice when it ups your credit limit or allows you a grace period to get your balance in the black, but these ‘generous’ gestures can actually backfire for consumers.

Banks and lenders need to be fair in the way they treat consumers and as such, they’ve come up with a number of ways to delay fees for missed payments, brought in long 0% balance transfer cards and upped credit limits without holders even asking.

But while these sound like benefits, they can actually backfire either when not used properly or because the information’s still recorded on your credit file which means your credit score may be adversely affected.

Here are four ‘generous’ bank gestures which can backfire:

1) Increased credit limit and how much you use

Banks and lenders love to hand out credit cards with high credit limits with research from charity Citizens Advice revealing that six million people had their credit limit upped in the last year without even asking for it.

But according to Justin Basini, CEO and founder of credit reference agency, ClearScore, not many people know that using too much of the limit can damage your credit score.

“The percentage of credit used out of a total credit limit is known as credit utilisation, and this is one of the factors determining a person’s score. Using around 30% or less is likely to improve your credit score as lenders are more confident you can repay the balance. However, using more than 50% may have a negative effect.”

ClearScore adds that 18 million Brits are at risk of damaging their credit score by using more than 30% of their credit limit, with 78% of them using more than 50%.

Basini says in order to maintain a good credit score, it advises not to use too much of your credit limit.

“As a guide, stick to less than 30% to show lenders you can manage your credit sensibly. If you are using more, don’t take out multiple credit cards as this will do further damage to your credit score, and use 30% of each,” he adds.

2) Missing a credit card payment

Most people have already or will at some point miss a payment on a credit card. With banks always happy to give you a little more time to repay the outstanding debt it doesn’t seem like the worst thing in the world to miss a payment.

“I’m afraid this isn’t true,” Basini says. “If you miss a payment or pay late on a debt, this will be marked on your credit report and it’s likely to have a negative effect on your credit score.

“If you miss several payments your lender may place your account into ‘default’. A default occurs if the lender decides to close your account because you’ve missed payments. A default will also stay on your credit report for six years. Every lender will have different rules for how many payments you’re allowed to miss before you default. Some will allow you to miss up to six payments but for some lenders you may only be able to miss two payments before you are declared in default,” he says.

ClearScore says in order to avoid damaging your credit score, it’s always best to stay on top of your payments and make sure you pay on time. “Consider setting up a direct debit for the minimum balance,” he adds.

3) 0 % cards don’t last forever

0% balance transfer cards are great for people looking to sort their finances. Balance transfer cards can be very useful for managing your debts by giving you some breathing room to pay off an existing balance interest-free, while 0% purchase cards can help spread the cost of a big purchase over several months.

But while 0% cards are among the most generous financial products, they also have pitfalls so you need to get the balance right, Basini says.

“You should aim to clear your debt within the introductory period, rather than simply making the minimum monthly repayment. That’s because when the introductory rate expires, you will automatically transfer to an APR of around 19.9% again,” he says.

He adds that it’s best to keep an eye on the clock as many lenders won’t notify you when the 0% period is over.

“It’s also important to resist the temptation to make purchases on a 0% balance transfer credit card, because you will pay the full APR on new spending,” he explains.

4) Grace period when you’re accidently overdrawn

If you’ve accidentally gone overdrawn, some banks may text you to say if you bring your balance back in the black by a certain time, you won’t face any fees or charges.

Basini says that in most cases, this won’t damage your credit score but there is a small chance it could have an adverse effect.

He explains: “Banks supply the file to credit referencing agency’s once a month. When they pull the data to send it on, they will look at the snapshot at that point in time. If there is an overdraft balance at that point in time, that will be reported.

“So, if banks pull the data between sending the text and a customer clearing the balance, this will be reported. But you would have to be pretty unlucky for this to happen,” he says.