What caught my eye this week.

Afternoon everyone, how are you finding the heatwave?

Portent of doom? Chance for a glass of vino in the garden at 8pm with your feet up pretending you’re in the Med?

Maybe a bit of both?

Actually, don’t answer. The usual suspects (or at least their social media bots) have moved on from blaming the EU and Covid denial to calling climate change a hoax. I’d rather they did so elsewhere.

At least shares have been recovering nicely.

The market seems to think it has sniffed out inflation rolling over, and in that environment future earnings become more valuable again.

I expected this – alas six months and one invasion ago – so I’m predisposed to agree. But when you look at the energy bills forecast for next year it’s going to take some believing. And another shock (or maybe yet a new variant in the pandemic) would surely set us back again.

Still as the graph below shows, it’s not unprecedented that a disinterested pound-cost averaging passive investor could get to December, do their annual check-in, and assume 2022 was a nothing happening year.

The rewards of passive investing stretch far further than saving a few quid on fees, right?

Have a balmy weekend.

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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.

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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