What Might Happen with Brexit

Brexit.

It’s that one word that has many Brits concerned for the future of the country and its relationship with its neighbours. Depending on where your political ideologies lie, you might consider Brexit as a chance for Britain to finally free itself from unwanted expenditures or a trap where it’s going to put itself in a hardly defensible corner.

However, one thing we can all agree on is that the vote to leave the European Union in 2016 had some serious effects on the country’s financial systems. As far as credit holders are concerned, there are several possible effects that Brexit might bring which can change the way they will handle their credit.

However, as with all events with potentially huge ramifications, understanding the consequences of Brexit will require us to understand how we got ourselves into this situation in the first place.

Why Did it Happen?

Depending on who you’d ask, the reasons why roughly 52% of Brits voted for Britain to leave the European Union can vary. However, there are several more pressing reasons that every discerning person should consider more than the others and these include:

1. The Economy

This is one of the most apparent reasons. Basically, a lot of British citizens no longer have faith in the EU since it has been disorganised and stagnating as far as its economics are concerned. Only a few member countries are able to enjoy stable economic conditions like Germany and Switzerland while the rest had to suffer from high unemployment rates and other economic concerns.
Another reason is that Britain is one of Europe’s major contributors as far as trade is concerned but has been receiving little to no returns in its investments. With the vote to leave Brexit, it was the hope of many that the country is able to bail out on a sinking economic ship before everything gets worse.

2. Push for Nationalism

In a shocking turn of events in the mid-2010s, many leaders were voted across the world that espoused a strong sense of nationalism. Simply put, these leaders believe that the needs of a greater union of nations should not go beyond the most basic of needs of their nation. This is a strong contrast of the past 15 years where things like multiculturalism and globalism were preached by many organizations, including the European Union.

A major factor that lead to Brexit was EU’s failure to address the growing immigrant crisis that affected it. With a massive influx of immigrants from Eastern Europe and African countries coming to the borders of many European countries, many considered Brexit as a pre-emptive move to protect the country’s national identity and a call to the EU to respect British sovereignty.

3. Politics

The safest thing to say about Brexit is that it is primarily a political move. It’s practically a decision made after a three-way struggle in Britain’s political arena. The “Leave” party felt that many of Britain’s ruling parties shared many traits with those that lead the European Union now i.e. elite snobs who have little to no regard with the welfare of their own people as well as their country’s national identity.

Then, there’s Donald Trump. The business tycoon/reality TV star was elected as the President of the United States in 2016 and has been making headlines ever since. His baffling yet bold strategy is to make friends out of states that many in the EU had not allied with, chiefly Russia, China, and North Korea. He, as with a lot of recently voted strongmen across the world, also made political attacks on many of America’s elites and those who have seeming contempt for the country’s nationalistic principles and systems.

Following this trend amongst several countries in the West, many leaders in the UK decided that now is the time to follow suit and clean house. A vote for Britain to leave the EU, then, is a vote to curb the powers of the “elite”.

Simply put, Brexit forms a part of a major political, economic, and cultural shift in the West. It is a move that seeks to enable countries to protect their own borders and prevent larger organisations such as the EU from overstepping.

The Effects of Brexit

Now that the reasons for why Brexit happened were made clear, the next step is to understand what it brings for the country. Mind you, there will be little to no changes at how debt is going to be incurred, managed, and recovered but events like Brexit tend to change the dynamics of certain aspects of society, leading to several changes for any person who has credit to their name.

Now, the effects of Brexit are broad even in the financial sector so it’s best to break it down to several parts.

1. Laws

For credit holders, the most important area of law for their activities is the Consumer Credit Law. This area of the legal system basically covers every transaction that one is allowed to do with their credit as well as the different remedies available to them in case of disputes.

The Consumer Credit Law takes it’s inspiration from what the EU currently has. However, since it was promulgated in Britain and is part of British Laws, only a vote for an amendment in Parliament will affect it, not a referendum like Brexit.

What Brexit does to this law, however, is remove a credit holder’s ability to take their case elsewhere in the EU if they don’t agree with what the British court upholds. If, for example, you’ve raised your credit report dispute to the court and the court rules in favour of the reporting agency, you can no longer take your case to the European Court of Justice and hope they’d rule out something more favourable to you.

2. Cross-Border Recognition

A benefit with being part of an organisation of nations is the ability to mitigate some of the effects of your debts if you move from one place to another. Under the EU, it is allowed for a citizen of one member nation to move to another member nation and all their debts incurred in the former can be dealt with in the latter.

The beauty about this is that whatever credit laws are in effect under that nation will be applied to a credit holder if they move there. If, for example, laws under that country allow only for bankruptcies to remain in your credit history for only 3 years whereas other countries hold it up to 12, your overall credit score should improve if you just move to that country.

Under the laws of EUs, also, it is stated that the original member state where you incurred those debts can no longer prosecute you of such provided that you have settled your debts properly in another country. So, if the new country you’ve settled your debt in has more favorable debt recovery laws and you’ve managed to clear all of your obligations under that law, you can return to your original country practically debt-free.

With Brexit, cross-border recognition no longer applies. Any debt you incurred with a British establishment is going to be dealt with under British law and, preferably, on British soil.

3. Credit Availability

If ever Britain’s vote will be implemented, the first ever thing that is going to happen is that interest rates will be cut down. Some experts even believe that interest rates can go down below zero which means, practically speaking, you should get a fraction of your payments back every time you pay for your debts in small increments.

Here is the problem, however. Credit is basically a different form of money and money is a finite resource regardless of what country you live in. Britain has a large but still finite supply of credit to offer and removing the steep requirements in managing these might just drastically lower their availability for everybody else.

However, banks are not just going to let this happen. They already have some measures put up to ensure that the usual credit cycle remains uninterrupted. Some of these fail safes are also designed to encourage credit holders to not get too reckless with their debts even if the upcoming separation promises them several advantages.

4. Tougher Debt Recovery

Although Brexit does offer some perks to credit holders, most of these advantages can only be observed for those that have good payment histories. Those that have less than favourable credit histories pre-Brexit are in for worse times.

Experts point to inflation and a generally low growth in income in the months to follow once Britain fully leaves the EU due to the expected political fallout from the event. This means that those with outstanding credit might find it even hard to meet the minimum payments every month, even if the interest rates get slashed.

The worst part? The low interest rates are merely temporary. As a matter of fact, interest rates for credit are expected to reach 1.25% before the decade ends. And that’s just after the vote was cast.

5. Credit Card Costs

As of now, the costs being charged to your credit card will remain the same as they were pre-Brexit. The United Kingdom is still technically part of the EU, after all, which means that they are still expected to abide by EU laws.

However, that does not mean things are going to get worse as far as credit card costs are concerned. Lawmakers are expected to incorporate many European laws into UK laws when Brexit is finalised. This means that some of the more favourable credit laws are expected to be included into existing laws. This means you can expect to not having to answer to hidden charges whenever you pull out your credit card for any transaction post-Brexit.

This doesn’t mean of course that you start maxing out on your credit limit regularly. Most of the EU laws focus on debt settlement, not removal. This means that if you do max out on your credit card limit for a month, you are expected to pay that amount as soon as possible. And if you fail to do so, there are fewer remedies now to help you mitigate the effects that debt will have on your credit score.

What Happens to Credit Reports and Ratings?

As of now, the UK is home to three credit ratings agencies: Standard & Poor’s, Fitch, and Moody’s. As UK is still part of the bloc, the ratings that these agencies will be honoured by the EU’s own European Securities and Market Authority. Even if these agencies technically operate outside of the EU, their ratings are still given the seal of approval by the ESMA as their ratings are deemed as an equal to what the organisation offers.

However, things are going to change in the coming years and Brexit contributes much to this. As of 2018, the ESMA is aiming to tighten its guidelines regarding foreign credit ratings. With their new regulations, every foreign agency credit rating will not be immediately accepted.

Instead, that agency has yet to first prove to the ESMA that their standards and operations are synchronous to the standards and operations as laid out by ESMA’s new guidelines. If not, then their ratings will not be recognised in any member state of the EU.

The effects of this new ESMA guideline is two-fold. In order for credit reporting agencies in the UK to be granted equivalent regulatory status, they’d have to implement their own changes which UK-based credit holders have to comply with. In effect, you’d still be following EU standards when it comes to credit but not directly.

Second, this means that once the UK finally leaves the EU, your credit score will not be honoured if ever you have to find work in any EU member state. This could work for and against you depending on your credit rating. If you had a bad credit rating, moving to an EU country before Brexit becomes final could wipe the slate clean for you. This is provided, of course, that you actually settled all of your debts prior to the move.

On the flip side, this means that you don’t get to bring your credit score with you if ever you moved. Your credit score might be still good in that EU member state provided that your payment history has been good but the score you will get might not be the same as it was in the UK.

There is still a chance that an equivalent rating status will be negotiated for by the UK when it leaves the bloc. After all, the UK and the EU are still expected to have some trade agreement of sorts. That being said, however, it’s important to prepare for the instance when you’d have to deal with two separate credit ratings for the same accounts in the future.

Making the Most out of the Post-Brexit Era

There is still quite a lot of time before the UK’s decision to leave the European bloc gets finalised. That being said, you have still a lot of time to prepare your financial status for the eventual changes. Here are two of them:

• Clear Your Debts on or Before 2019 – By this time, you should have identified the most onerous of your credit obligations and are working on paying them. If possible, you should have cleared out most of your debts before December of 2019. This way, your credit account starts on a new slate for the new decade and won’t be haunted by outstanding balances once the country finally leaves the EU and those economic changes start appearing.
• Get a 0% Interest Card – If you are still concerned about debt that you might incur post-Brexit, you can always request for a move to a credit card with 0% interest. Remember that interest rates are going to fluctuate once the move is finalised which means that you can either deal with zero rates or steep ones depending on what trends the financial sector will follow.
  Of course, applying for a new credit card means that you are going to get a hard search on your account. So that your credit score does not get affected by that much, apply for one credit card at a time over a longer period of time. If you do the move right, you might just be able to pay your debts without having to worry about erratic interest rate changes in the years to follow.

In Conclusion

Regardless of how you feel about Brexit, there’s no denying that the next few years for Britain are going to be interesting as far as credit is concerned. This is where your ability to adapt to change will come into play because, frankly speaking, the changes brought about by Britain’s eventual departure from the European bloc either works for and against you. This depends, of course, on how well you were prepared for it.

Are you worried about the changes that Brexit will bring to your credit status? What other finance-related issues do you think might pop up in case Britain really leaves the wider European Union? Let us know in the comments below.