Many of us have an overdraft on an account we rarely use, or a credit card lying dormant in a drawer at home, kept only for emergencies. But if you never use it then you might it's soon reduced or removed by your bank. That’s because financial services companies are having to comply with new accounting rules which come into force next year. Here's what you need to know…

What’s happening?

From January 1, 2018, banks and card providers will have to set aside provision in case customers don’t repay loans, mortgages, cards or overdrafts. This includes unused overdrafts or credit card borrowing limits which their customers never fully use.

In order to reduce their overall costs, banks will want to close down cards or accounts which are dormant or inactive and to reduce the credit limit on cards where the customer only uses a small amount of available credit.

 

Which accounts will be affected?

Cards, overdrafts or loans which have never been activated, those that have never been used, those which have been used but not recently, and those where the customer has only used a portion of their overall limit are likely to be affected.

An inactive account is one that has not been used for 12 to 18 months. 

 

How will I know if my credit allowance is being reduced?

Your bank would write to you to give notice you that your credit allowance would be decreased or withdrawn unless you started to use the card or the overdraft again. You would have around 35 days to take action.

However, if you have a credit card and you are only paying off the minimum payment every month, and then you miss a couple of payments, then your card provider has the right to reduce your credit limit straight away.

The changes will be introduced gradually, and card companies are likely to see what response they get from small groups of “test” customers before they roll out a full programme.

 

The advantages of spare credit

Trying to get hold of extra credit at short notice can be very expensive, so having a buffer zone in place can be reassuring, even if you rarely use it.

It can count in your favour if you have a high credit limit but you only use a small portion of it each month, and you pay it off. Lenders like to see that you have not maxed out on all your cards and that you are not constantly overdrawn.

Your credit score is likely to be good if you have credit but don’t use your full amount every month. Lenders like to see that you have some “headroom”. In practice, this means that they prefer you to use only about 25 per cent of your available credit at any one time—that would mean £1,000 on a £4,000 credit facility.

 

Is it worth having more credit than I actually need?

There is no harm in having an emergency credit card, but you do need to use it occasionally to keep it active.

Some cards come with annual or monthly fees, so if you are not making the most of them you are going to be paying for services you don’t need.

If you own several cards which add up to a large amount of credit, either used or unused, then a new lender may be concerned about the capacity for you to borrow the entire sum all at once and then struggle to pay it all back.

If you always use all of your authorised overdr t, and have one or more personal loans as well, your lender might start to worry about how you will be able to pay back all your borrowings.

 

Take stock of your credit

It’s a good idea to have an annual review of your borrowing. Check the rates on your overdraft, your personal loan and any credit cards you are holding. Are they still offering the best deal, or should you shop around for a lower interest rate?

Would you be better off switching to a different card with 0 per cent interest in order to pay off your debt? Could you make more than the minimum monthly payment in order to clear your debts more quickly?

If you do find a better deal, don’t forget to close down your old cards that you will no longer be using.

If you’re holding a lot of credit cards you don't use, you may be paying needless annual fees or dormancy fees, or you may be maxed out, which would be a warning sign for potential lenders.

If you are worried about your finances you can take the Debt Test on the Money Advice Service’s website. You can also get help with debt from a number of confidential and free counselling services such as StepChange debt charity and the National Debtline.

 

Read more advice from Marianne Curphey

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