If you’ve recently applied for credit card, loan, or mortgage, and been rejected, it can be a frustrating experience. Understanding why it has happened could improve your chances of being approved in the future, and it could also make you think again about whether borrowing money is right for you.
Here are the top reasons for being refused credit:
You don’t have a credit history
You’re not on the electoral register
There are mistakes on your credit report
You’ve made too many applications for credit
You’re always maxed out
You’ve got lots of spare credit that you don’t use
If you are young and haven’t yet started paying regular bills, a credit card company won’t have any track record of how good you are at keeping up with monthly payments.
One of the first things a lender will look at is whether you have a permanent home address, and how long you have been there. It’s essential you are on the electoral role, and lenders want to make sure you are not committing identify fraud, so make sure you register, and that the records are correct.
How to fix it: Visit Gov.UK and register to vote.
There are three main credit reference agencies which collate your personal financial data for banks, mortgage lenders, credit card and loan companies to use when they assess your suitability for credit. These are Equifax, Experian and Callcredit. Sometimes information is wrong, outdated, or incomplete, which could affect your rating.
How to fix it: Ask for a copy of your credit report, and write back if you find any mistakes. If you can explain where you missed a payment for a good reason, sending a “notice of correction” to the agency may get your credit report back into shape.
This can make you look desperate. If you start applying for a lot of new cards or loans within a short space of time, it sets off alarm bells for a lender and can significantly reduce your credit score.
How to fix it: Be selective about how and when you borrow, and don’t keep applying if you’ve been turned down more than once. Think about alternatives, such as an overdraft, or read our guide on how to get out of debt.
Lenders will worry about how you will be able to afford new credit if you are up to your limit on what you already have. New ways of assessing affordability are also being used by lenders, which means they get a more holistic view of your finances, and a picture of how you might or might not cope with more borrowing.
How to fix it: Cut down your spending. If you’re not sure where to start, read our guide on how to save money.
You might think that lenders would like this – after all, it shows that despite having the potential to borrow a lot, you’ve got plenty of self control. Actually, lenders worry that you could use this spare capacity to its maximum, putting your ability to repay at risk. Although it might sound strange, having a big chunk of spare credit could affect your credit rating.
How to fix it: Close down dormant accounts, and ask your lender to lower the credit limit on cards you rarely use.
Financial services firms are under pressure from the financial watchdog, the Financial Conduct Authority (FCA) to give more help to customers who are struggling with debt, and to assist customers who’ve been in persistent debt – 18 months or more – to start to repay what they owe.
The FCA has also been looking at the “minimum payment” that appears on credit card statements each month, and is the very smallest amount you can pay off without incurring a penalty. Some customers are inclined to pay the amount that is printed in bold on the statement – even if that will cost them much more in interest payments over time.
Steve Hadaway, the Europe, Middle East and Africa chief of FICO, a software company which analyses customer data for banks, credit cards, building societies, loan companies and other financial services firms, says that traditional credit scores alone cannot help lenders accurately determine the risk of whether a customer is going to default on their loan or card.
So in order to make credit risk assessments more robust, industry regulators are putting more attention on “affordability risk” – the measure of both ability and willingness of a consumer in repaying debt.
FICO has a new tool to assess whether a customer will be able to repay, and how they might cope if they were given new credit. Many of the major banks and lenders are now using this software, which means that people who might have been given credit in the past could now be refused to protect them from falling into debt.
“Traditional credit scores are a good indication of when someone is going to default but they are not a good indicator of what strain the customer is under,” he says. In other words, they can’t give an overall picture of whether a customer is comfortable with repaying, or struggling to make ends meet. The new FICO software has an indebtedness score which identifies those customers more likely to fall behind on payments.
On the one hand, this means lenders are going to be much more picky about who they lend to, but on the flip side, it could help protect vulnerable customers from taking on debt they can’t repay.
“Interest rates are going up, levels of customer debt are very high compared to previous years, and inflation is rising,” he explains. “We are able to look at an index which analyses what would happen if a customer had a change in their credit card balance, or if they were given more credit.”
The data-crunching behind the scenes “should be invisible to consumers”. Overall, the “outcome should be fairer, with those struggling with affordability not given extra credit, or offered credit terms that are more appropriate to their circumstances,” he says.
It should help customers avoid going into persistent debt.
“Many financial services companies use scoring to decide on preapproved offers – the ones you receive in the post,” he says. “In the future, your bank might tailor its advice – saying you would be better off with a loan than an overdraft, because they have a more holistic view of your circumstances. Many customers will see no change, but it is about offering them the most appropriate type of credit for their needs.”