In my early 20s I was a debit card kind of guy. I’d save what I could, and frowned at the thought of borrowing money that I didn’t have on plastic, to pay for goods and services I didn’t need. I also (mistakenly) believed that applying for a credit card would be harmful to my future credit score.

While ‘credit score building’ wasn’t taught in school, I knew some people had better scores than others. I also vaguely understood that creditworthiness was important to get a decent mortgage.

Now I’m more financially astute, I appreciate that credit cards have a lot of other uses besides giving free and easy access to cash.

But what about that relationship between credit cards and credit scores? Is that still a legitimate concern? Will applying for a credit card negatively impact your future creditworthiness?

Let’s take a look at how credit scores work, and what happens when you make an application.

What happens to your credit score when you apply for a credit card?

Every time you apply for a credit card you must undergo a credit search. These searches are deemed either ‘hard’ or ‘soft’.

Hard searches are more common when you make an application for credit. If you undergo a hard search as part of a credit card application then it will show on your credit file.

Other lenders will be able to see this later. They will know you made an application for credit on a particular date.

A ‘hard’ search is logged even if you aren’t looking to borrow money. For example, you may just want to apply for a credit card to earn cashback or rewards on your everyday spending.

Soft searches, on the other hand, are more lenient. Only you can see soft searches on your credit file. Lender’s can’t.

Soft searches are rarer than hard searches. They mostly apply to current account applications. And even then, many current account providers still require applicants to undergo a hard search.

Hard searches aren’t all that concerning

Now for the good news. While hard searches may seem scarier than soft searches, they aren’t really a big deal.

Yes, hard searches leave a visible mark on your credit file. But they aren’t recorded forever.

Most hard searches will drop off your credit report after a year, according to the credit reporting giant Experian.

With this in mind, if you applied for a credit card over a year ago, it will probably no longer have any impact on your future creditworthiness.

Even more importantly, visible marks on your credit file DON’T give lenders any indication on whether you’ve been accepted for a card.

If you’re rejected for a credit card, you needn’t be embarrassed that other lenders will be able to see that another lender has shown you the door.

It’s still worth minimising the number of credit applications you make

Even though most applications for credit are removed from your credit file after a year or so, it’s a bad idea to apply for credit cards like there’s no tomorrow.

Remember, any credit applications you make do remain visible on your file for up to a year.

So if you make multiple credit cards applications in a short space of time, lenders may get the idea you’re in dire financial straits and are desperate for cash. This can paint a picture that you’re irresponsible with money, and therefore less likely to repay anything you borrow.

In other words, make several credit card applications in a row and there’s a high chance you’ll find yourself in a rejection spiral.

If you are ever rejected for a credit card, it’s best to take a step back and properly assess which cards are most likely to accept you, before you continue to make applications.

Card credit eligibility checkers can protect your credit score

Every credit card lender has its own acceptance criteria. Apart from a handful cards of that offer pre-approval before you even apply, lender’s borrowing criteria is often top secret.

And so you often won’t know whether you’re likely to be accepted for a card before you make your application.

This is where credit card eligibility checkers (or calculators) can be very useful.

Eligibility checkers enable you to enter your details and get a view on your chances of acceptance for various cards – without having to encounter a hard search.

Some of the better eligibility checkers – such as the one managed by MoneySavingExpert – also list cards that offer pre-approval.

If you’re pre-approved for a card then you’ll definitely get it if you go on to apply.

Credit file vs credit score: what’s the difference?

In simple terms, your credit file (also known as a credit report) contains your personal details, plus any past or present debts you have. It also details any missed debt payments.

Your credit score meanwhile is a figure that credit rating agencies have come up with, based on your credit file. Lenders may use this score when determining your overall creditworthiness – though each lender ultimately makes it own decision on whether to give you access to credit.

You have a right to access your credit report and score from any of the UK’s big credit rating agencies: Experian, TransUnion, and Equifax.

Getting a credit card can help your credit score

One of the biggest myths in personal finance is that using credit cards can only be harmful to your credit score.

In fact, the opposite can be true. A credit card may actually help boost your creditworthiness.

For example, if you have little or no credit history – which is typically the case for students or new graduates – then lenders won’t have much of an idea as to the likelihood of you managing credit responsibly. That is why students typically have mediocre credit scores.

If this applies to you, then one way of boosting your credit score can be to sign up for a specialist ‘credit card for bad credit’. Such cards often have low acceptance criteria, though in return, they come with enormous annual percentage rates (APR).

However, high charges shouldn’t be an issue if you fully repay your balance each month.

If you don’t think you can or will keep up with your repayments, then don’t get a card. Period!

But if you do get one of these specialist cards, spend responsibly, stay within your credit limit, and clear your balance each month, then you should see your credit score improve after six months or so.

We’re out of time to dive into the different ‘bad credit cards’ available. Honestly, there isn’t much to choose between them. But two popular brands to begin your research are Marbles and Capital One.

Do you pay any attention to your credit score? Is there anything I’ve missed above? I’d love to hear your thoughts in the comments section below.

How long does it take equities to recover from a bear market?

By that I mean not just how long does it take for a bear market to end. Bears can be officially over in months.

But how long does it take us for us to recover our losses? To get back in the black?

Sadly, that’s a much longer slog… 

UK bear market recovery times

The financial software people at Timeline have produced an excellent chart tracing the severity and length of UK bear markets.

They calculated the recovery time for £100,000 of UK equities after each bear market from 1926 to the end of 2021. 

The graph line reveals the extent of the loss at market bottom. 

The END dates show when your investment finally breaks even – that is, when your investment is worth £100,000 again (dividends reinvested). 

The data reveals that the:

• Average bear market recovery time is 18 months
• Shortest bear market recovery time was 11 months (Fallout from the US ‘Vietnam War’ recession)
• Longest bear market recovery time was two years and seven months (Dotcom bust)

That’s recovery time after the end of the bear market itself. 

How long does the whole thing take?

The total duration of a bear market event is more daunting when you add its downward leg to the recovery time back to breakeven:

Data from the Timeline Chart 2022. Dividends reinvested. Nominal returns.

The total length of a bear market including recovery time is: 

• On average: three years and one month
• Shortest: one year and four months (Coronavirus crash)
• Longest: five years (Dotcom bust)

Quite the buzz kill, right? The total recovery time was still over a year for even the short yet savage 1987 and pandemic crashes – despite the fact that both lasted only a couple of months as bear markets. 

And grim as these totals already are, they also miss out a crucial component: inflation. 

Because as investors living in the real world, we don’t care about the beauty contest that is nominal wealth.

We care about our purchasing power. So we need to know how much our investments are worth in real terms.1

The question: how soon do we recover from a bear market, taking into account inflation?

UK real-return bear market recovery times

Professor Wade Pfau calculates the UK stock market took 11 years to recover in real terms from its 1972-74 crash. As opposed to four years and ten months in the nominal returns table above.

And using crude annual returns, I’ve calculated the real recovery time for a few more UK bear markets (dividends included) as follows:

Bear market	Nominal recovery	Real recovery	Real duration
1929-32	1935	1932	3 years
1937-40	1941	1944	7 years
1972-74	1977	1983	11 years
2007-09	2011	2013	6 years

Ironically, UK deflation shortens the real recovery time of our version of the 1929 crash.

But when it comes to the other three UK bear markets, factoring in the wealth-whipping headwind of inflation pushes out recovery times significantly. 

US bear market real-return recovery times

We can calculate real-terms recoveries more accurately thanks to publicly available data for the US stock market.  

Here are the inflation-adjusted bear market recovery times for the S&P 500:

Calculations made using DQYDJ’s S&P 500 return calculator. Monthly returns. CPI-adjusted. Dividends reinvested. Fall % is a nominal return.

Now we have a more realistic view of the impact of multiple bear markets. 

Bear market recovery time, adjusted for inflation, and including the down leg measures:

• On average: four years and four months
• Shortest: six months (Coronavirus crash)
• Longest: 13 years (Dotcom bust)

However, if we bundle up the series of slumps that marked the Great Depression, we get one giant bear lasting from September 1929 to January 1945. That’s 15 years and four months until you broke even.2

At least that’s better than the oft-quoted 25 year recovery time that doesn’t include dividends or deflation, and is based on the narrower Dow Jones index.

We can see that inflation adds more than a year on average to bear market recovery times by crudely comparing the UK’s nominal three year and one month average to the full-fat four year and four month total bear duration. 

Moreover, the US suffered three lost decades. One great bear leaves investors covered in paw prints every 20 to 25 years. 

There’s a fairly clear, if imperfect, correlation between the depth of the decline and the length of the recovery. 

Once we’re slammed into -45% territory then you’re looking at a real return recovery time of half a decade or more. 

What’s the worse case scenario?

As detailed in our gargantuan bear markets primer, major meltdowns can be brutal. It took more than 31 years to recover from Japan’s 1989 bear market. 

The worst bear I’ve read about is Austria’s 89 year wait to breakeven. That followed a -96% carve-up in 1914-25. 

My best investment advice: don’t invest all your money into an empire that loses a world war and is permanently dismembered in the aftermath. 

In fact, even Austria’s death plunge isn’t as bad as the total wipeouts sustained by Russian and Chinese investors after their Communist Revolutions.

Buy and hold definitely doesn’t work when the Marxists shut down the stock exchange. 

Living in the real world

Above we’ve considered market data. But in reality, the bear market recovery time we experience will be further drawn out by investment costs.

We can improve our results by pound-cost averaging through the downturn – and by diversifying into defensive assets such as government bonds ahead of time.

The chart below shows how a higher allocation to high-quality government bonds sped up the recovery from the coronavirus crash vs a pure equities portfolio:

Source: JP Morgan: Guide to the Markets. 31 May 2022. Page 63.

Perhaps even more importantly, a 60/40 portfolio dramatically reduced the severity of the bear market.

Experiencing shallower swoons makes it easier to stay the course. It’s far harder to come back from a bear market if you panic sell after a deep loss, lock in your losses, and then miss the rebound.

Take the right steps to protect your portfolio ahead of time. It’s usually too late once a bear market runs wild.

Take it steady,

The Accumulator

1. Real returns subtract out inflation from your investment results. They’re thus a more accurate portrayal of how your capital has grown in relation to purchasing power than are standard nominal returns. [↩]
2. The November 1936 recovery from the 1929 crash lasts only a few months before the next bear begins in March 1937. [↩]

What caught my eye this week.

Families respond to tragedy and upheaval in different ways.

Histrionics. Denial. A chance to air old grievances. An opportunity for a clean break with the past.

In my family we’re tactically jovial but strategically gloomy. We’ll laugh on the way to the hospital – and invariably with the patient. But we’ll gameplay the worst on the drive home or on WhatsApp.

Among my clan of brooding pessimists, I’ve inherited the file marked Worst Case Scenarios from my father.

I don’t think I’ve ever met anyone as personally content with his life as my dad seemed to be.

But boy, could he strategize like a 1950s Cold Warrior gaming out nuclear Armageddon.

When he passed it fell to me to be my family’s wartime consigliere – if not its walking, talking memento mori.

Whether it’s packing a raincoat for a summer holiday, doubling down on life assurance, or accelerating a long haul visit to a sickening relative, I’m always ready to make the case for the downside.

I could therefore relate to Bank of England Governor Andrew Bailey this week when he followed his upper-cut of a 0.5% interest rate rise – itself the largest for 27 years – with an economic forecast that amounted to a kick in the balls.

Britain is to enter recession in autumn, we were warned, and it’s going to last more than a year.

Oh, and despite that hiking of interest rates, inflation will still hit 13% anyway.

As someone who is genetically wired to expect the worst and be surprised by the best, I take this as little more than a ruffle in the hair from my dad at the backdoor with a gentle “stay safe”.

But it seems to have thrown the country at large into convulsions.

The Man Who Sold the World

If I linked to all the different takes in response to Andrew Bailey’s portents, this article would resemble an old-school link farm and Monevator would go into Google’s naughty box.

But fire up your search browser and sniff around and you’ll find:

• Those who think Bailey is being wantonly pessimistic, scaring us for no good reason.

• Many who think he’s anyway making it worse by raising rates.

• Others (including some of the above) who still think he should have raised rates earlier.

• People – including politicians – who superstitiously believe what you say comes true and so damn him for his gloom.

• Left-wing activists who believe we should continue spending money like its 2020 to keep us out of the imminent downturn.

• Right-wing activists – and a Tory leadership candidate – who believe we should cut taxes and let inflation rip to keep us out of the imminent downturn.

And that’s just a taster of the range of the contradictory responses.

I doubt Bailey entered Bank of England governing to become Mr Popular. But like this he’s cast himself as the macro-economic equivalent of reality TV’s Naughty Nick.

Everyone can now boo when he appears on the screen. If we didn’t have the Lionesses to bring us a rare moment of national unity, at least we’d have the Bank of England, eh?

All Apologies

I am more sympathetic than most to Bailey’s plight.

The Bank of England has no good choices. It’s tasked with solving a problem that’s mostly not of its making and that anyway it hasn’t got a great solution to.

Many people seem to have forgotten we’ve just lived through a pandemic that saw vast chunks of the economy switched off, untold billions borrowed on the never-never, money sent to millions of workers to pay them to stay at home ordering goods off Amazon – and that as recently as this spring the world’s workshop, China, was back in idle mode.

I warned in our debates at the time that it was fanciful to imagine you could turn off our finely-tuned just-in-time economic system without, at least, seeing the machine splutter and judder when you switched it back on.

Yet I was equally surprised by how well the economy shape-shifted to (ongoing) working from home – and also by the success of those expensive furlough schemes in entirely warding off skyrocketing unemployment.

Take a moment to add all this up. Billions of workers and millions of factories randomly turning on and off for weeks on end. Immense fiscal transfers. Formerly obscure economic sectors – from baking sourdough to gambling on tech stocks – blossoming in lockdown, then wilting on reopening. The millions who never lost their jobs competing with everyone else for a suddenly limited supply of goods and then later a resurgent demand for services. All this over just two years.

You could even add in some black market mystery. I suspect there’s an untold story of extra economic activity outside of the tax system during the pandemic that may not have quite abated, and that is still distorting the numbers.

And people are surprised we’re not back to a 1990s Goldilocks economy?

Drain You

Then of course there’s the Russian invasion of Ukraine. The surge in a broad swathe of commodity prices that followed Putin’s Hail Mary Risk play has eased. But energy remains a crisis.

That’s especially true in Europe – including the UK – which has been rudely woken up from a daydream of conflicting energy policies. You know, gorging on fossil fuels bought from an autocrat who has admitted he wants to redraw your borders even while you close down nuclear reactors – and all the while fretting about climate change. That sort of thing.

To cap it all, I’ve long expected a tougher time ahead for Britain, thanks to our self-inflicted Brexit.

I was already using the dreaded word ‘stagflation’ in June 2021 when higher inflation seemed a certainty. However I wasn’t confident then about a recession.

But early this year the Russian invasion – and the start of quantitative tightening – put the boot in.

The Bank of England is pinning the blame squarely on soaring energy bills. With the cap on bills expected to hit £3,500 in October, who can blame them?

All the money that goes into heating and lighting our homes can’t be spent elsewhere in the economy. A slowdown is inevitable.

The Bank has nothing to gain from wading into politics. But of course our politics makes it worse.

Lithium

Counterfactual scenarios can be fanciful alternate realities that tell you more about their author than the real-world.

Mine are obviously no different.

But such scenarios are also a safe-space for imagining how things could be different. They provide a lens to seeing where you’ve possibly gone wrong. And perhaps what you might do about it.

As an open economy with an aging population, the UK was never going to escape a ravaging from the Covid pandemic. But our politics over the past six years has made our plight worse.

The sheer cost of the upheaval and distraction of Brexit is impossible to calculate. The slump in inward investment and the de-rating of our equity market is less controversial.

Most countries face post-pandemic staffing problems. But ours are worse, given we switched off the potential free movement of millions overnight. The friction and cost at our borders is also now beyond doubt.

Some readers will groan at me bringing all this up again. Get used to it. I understand it’s hard even for the ambivalent not to be bored, but these consequences are not magically going away.

They will incrementally make our economy weaker. They will cause us more pain, by curbing our freedom of action.

Dumb

Indeed it’s interesting to compare today with the years following the financial crisis.

Despite being whacked as hard as anyone due to our enormous financial sector, the UK – and especially London – prospered, relatively-speaking, in the post-crash years.

Talent and money flowed in, for good and ill.

At worse, we saw dark money from dubious Russians bidding up the price of Mayfair properties.

But at best we saw hundreds of thousands of bright people leave the slower-growing and crisis-stricken economies of Europe to seek their fortunes here.

I watched an entire sector – Fintech – basically built on the brains of bright newcomers to the UK.

But there is much less chance of us creating a new Revolut or Transferwise this time around, given Britain’s plunging attractions to overseas talent:

Source: Financial Times

I suppose this was one of the aims of our leaving the EU. Job done I guess.

But when your country is less appealing to talent than Saudi Arabia you know you’ve got a fight on.

Meanwhile the candidates for our next un-elected Prime Minister continue to simply whistle to their hardcore voters as if none of this was happening.

The Tory party membership is an electorate who thinks Dunning-Kruger is a dodgy German wine. I don’t say the loons on the far-left of the Labour party would be any better, but the fact is right now it’s a brotherhood of Blimps who will determine our political response over the next few years.

Curb your enthusiasm accordingly.

Territorial Pissings

Before one of the dwindling band of Brexit ultras pipes up, I’m definitely not blaming our general economic situation on their glorious project.

Yes we’ve hobbled ourselves with a self-inflicted knee-capping. But these troubles are global.

Some countries are doing better than others – although nobody’s politics reflects that.

The various factions of the US chattering classes for example are continuing to tear themselves to shreds. But I’d rather have its economic problems than ours.

The US is self-sufficient for energy (and much else) for starters. But also, its equally unpredictable economic recovery seems to me more like a car checking its speed after coming too fast off the freeway than a vehicle running off the road.

Yes, the US just saw two quarters of negative economic growth. But it also just added another 500,000 jobs to its workforce, which is now larger than before Covid.

With recessions like that, who needs a boom?

I jest, a bit. We’ve been doing well for jobs, too. Also just like the Bank of England, the US Federal Reserve faces the same difficulty of raising interest rates to tackle inflation caused by utterly indifferent factors – supply chains, war, the hangover from Covid support – and again in the face of widespread hostility.

So while I fancy its chances better than ours, the US definitely has challenges. And unlike ours, its response will continue to reverberate around the world, especially via interest rates.

Particularly infuriating are the popular US commentators who condemned the Fed for talking about rate rises earlier – who said they’d prefer to see inflation run hot, and more QE if needed, and an end to boom-and-bust – who now chastise the same Fed for being too late!

Peak central banker was definitely 20 years ago.

Negative Creep

For my part I don’t have any great answers. I mostly have more questions.

To stick with the gloomy theme, for example, where are – or rather aren’t – all the people who died during the pandemic in the economic discussion?

We lost a quarter of a million souls to Covid in the UK. The US more than a million. But you rarely (ever?) hear anyone factoring in their loss into their economic deliberations.

Perhaps now the emotional intensity has died down, there is an acceptance that Covid’s victims were not those whose loss would cause the most upheaval in pure economic terms. (I got hate email for saying so early in the pandemic).

Even more controversially, perhaps the excess deaths from Covid weren’t so excessive on a two-year view? (Very probably not).

Then there’s the question of how we reshape our economies after the huge changes wrought by working from home for years, and an avowed desire for de-globalization.

Finally, there’s the musical chairs of the workforce.

I’ve used the analogy of a machine juddering in fits and starts back into life to explain why I’m not surprised to see the economy so unsettled.

Similarly, I think of the workforce via a sporting analogy of a ‘man out of position’. People just aren’t where they would be optimally if the pandemic hadn’t happened, both geographically and skills-wise.

In some places this is obvious: think struggling NHS wards and broken airports.

But in other places much less so – until you look at, for example, programmer salaries rocketing earlier this year.

All of these factors will take time to resolve themselves.

Come As You Are

I’ve been accused by some readers of being too gloomy for the better part of a year, albeit mostly regarding the market.

I appreciate I won’t have brightened anyone’s Saturday morning with this missive, either.

However we are where we are. Fatten your emergency funds, keep investing, stay usefully employed if you can. Things will get better eventually.

Heck, if you need to then by all means look on the bright side.

Things could definitely be worse. Covid could have turned out to preferentially kill 20-somethings with children. Unemployment might have surged. Policymakers could have hesitated and withheld relief for workers, plunging us into a depression.

A bleak way to cheer up? Again I’m a wartime consigliere. Don’t come to me for faith healing.

Of course I’ve known families who approach the worst in completely the opposite way to mine.

They refuse to talk about a fatal prognosis, say, except in short bursts of stony-faced indifference with doctors. Back on the ward in visiting hours, they’re waving holiday brochures under the nose of their unfortunate – and unconscious – relative.

There’s an upside to that sort of insurmountable optimism. And miracles do happen.

How about we split the difference and settle for muddling through?

Have a great weekend – and to conclude on-brand, try not to think about how this glorious weather is causing the worst drought for a century…

(Wait, come back!)

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