The immediate panic, massive cash injection and frantic admin to give us a bit of financial wriggle room in the face of an overwhelming situation is all but done.
While there will be a need for further action, for fine-tuning and, eventually, a strategy for unravelling the incredible emergency measures we’ve borne witness to over the last month, the dust seems to be settling for now.
The word “unprecedented” has been used with almost every breath taken and every sentence written about the response to Covid-19 with good reason.
The kind of moves we’ve seen by the chancellor, the Treasury, even banks infamous for their snail-like pace of change, actioned remarkably consistently and even more remarkably without challenge, even at breakneck speed, would have taken years to implement in peacetime.
The long shadow of the banking bailout
Take the latest changes on overdrafts alone. The battle for change may have been raging soon after the taxpayer had bailed out the banks during the financial crash, but it took at least eight years of warnings, appeals and lobbying before a ban on complex overdraft charges was introduced a few months ago.
The fee plus interest rate structure and extras for unauthorised borrowing that made it so hard to calculate or compare what we were paying were replaced by a single, clear rate of interest.
The money earned on charges and interest represents a significant chunk of profit for a banking industry that has seen other routes to margin, not least infamous PPI products, eroded.
The response from the industry over this latest restriction was, typically, to almost double the interest rate paid if you dipped into the red to around 40 per cent a year – a move that was due to kick in at the beginning of this month.
Last week though, the Financial Conduct Authority (FCA) having already pushed for banks to halt that rate hike, published a package of further, temporary relief proposals for those using overdrafts, credit cards and other types of personal debt.
It included measures that meant customers who have been hit financially by coronavirus and already have an arranged overdraft on their main account would be charged 0 per cent for the first £500 of it for up to three months.
Other changes include a temporary payment freeze on loans and credit cards for up to three months – another huge hit to the corporate purse.
But while some financial institutions have been quick off the mark, some slow, and some going further to offer the full overdraft for free for a short time, there has been barely a murmur of dissent, at least publicly.
“These proposals will help to prevent millions of borrowers being unfairly penalised through the emergency use of debt during this difficult time,” said Becky O’Connor, a personal finance specialist at Royal London.
“The measures will compel a greater generosity than might have been offered if lenders were left to their own devices.
“By standardising the help available, this levels the playing field and offers the same level of fairness for all who find themselves suddenly and unavoidably dependent on debt.”
But what consumers can’t now do is assume everything is in hand.
For starters, the payment holidays already announced will free up some much-needed emergency cash for a few months but they don’t, so far, include a freeze on accrued interest. That means those with borrowing will continue to rack up costs on interest even while their authorised payment holiday or freeze is in place.
As a result, the total cost of the mortgage or loan will be higher than if the payments had continued.
Crucially, many people don’t realise that most of these measures will not be universally applied by the bank or other financial institution. All the concessions are for those who are experiencing financial difficulty as a result of Covid-19. That is a lot of people – a terrifying number in fact – but it isn’t everybody.
The customer has to get in contact with their provider and formally confirm the arrangement.
We already know thousands of people are simply cancelling their direct debits rather than jumping through the (surprisingly few and simple) hoops to agree the plans with the lender.
This could quickly cause problems with late payment charges and points knocked off credit scores – with potentially serious long-term effects. Miss a couple of mortgage payments without that crucial prior agreement under any circumstances, including Covid-19, and you may find future borrowing is closed to you for several years.
So important is the credit report point that even in the midst of all this, part of the FCA’s latest measures demands that providers must be sure that those customers who they have confirmed agreements with don’t see a negative impact on their credit rating.
This week, that was backed up by the credit freeze agreement (CRA) announced by the three major credit reference agencies – Experian, Equifax and TransUnion.
“These are challenging times. While everyone is rightly focused on staying safe and healthy, we know that many people are also concerned about the impact on their income,” Jonathan Westley, the chief data officer at Experian, said, adding that some lenders may also consider special arrangements such as reduced payments and increased credit limits.
“If you’re worried about meeting regular payments because of the pandemic, it is crucial that you speak to your lenders and other providers as soon as possible so they can help.”
Q&A: Coronavirus and my credit report
The major credit reference agencies answer the most frequently asked questions:
How will a payment freeze be reflected on my credit report?
If you and your lender agree an emergency payment freeze, the payment status of your account (with that lender) will not get worse while your payments are paused. For example, if your account was up to date before the freeze began, your account will continue to show as up to date until the freeze ends. If you were already behind with payments, the level of arrears before the freeze began will continue for the duration of the freeze. During the freeze, the monthly payment amount shown on your report will stay the same.
Will the payment freeze be recorded anywhere on my credit report?
No, the fact that you agreed a payment freeze with a lender or provider will not be recorded on those accounts or anywhere else on your credit report.
How will a payment freeze affect my credit score?
Agreeing with lenders to pause your payments for a while should not result in missed payments building up on your credit report. This should generally mean your credit score won’t be damaged. Be aware that, as well as the payment status of your accounts, credit scores also take account of many other factors, such as your total level of unsecured debt (for example, the balance of any credit cards, personal loans and overdrafts) and how heavily you are using your credit cards (your credit utilisation).
Could the payment freeze impact my ability to get credit in the future?
Under the Emergency Payment Freeze agreement, an individual’s credit score will be maintained or frozen for the duration of the agreed payment holiday. CRAs cannot guarantee that payment holidays will not impact a consumer’s ability to get credit in the future, as lender policies will be different across the industry. This should be discussed with your lender directly.
What if I fall behind with payments without an agreed payment holiday in place?
If a consumer falls behind without a payment freeze, then the usual CRA position will apply – a worsening status is likely to mean that your credit file is impacted, which is why it’s so important to have early conversations with your lender if you think you may have trouble meeting any of your repayments.
I tried to call my lender but couldn’t get through. Could I just cancel my direct debit?
Until you have discussed your circumstances with lenders, try to keep making regular payments if you can. We strongly discourage pausing payments, for example by cancelling direct debits, without first agreeing this with your lenders and providers. Unauthorised missed payments are bad news for credit scores and could, therefore, affect your chances of getting credit in the future. Banks, lenders and other providers have been understandably busy trying to help their customers at this difficult time. To help, several mortgage lenders have recently updated their websites to allow customers to apply to pause their payments online.