Almost one in five people applying for a credit card or personal loan over the past year has been turned down, according to research by BuddyLoans.
Having a poor credit history is the top culprit when it comes to rejection, preventing 40 per cent of people getting accepted for a credit card, loan or even a phone contract.
Borrowers blame everything from the generation rent trap or an ex partner’s debts to the effects of having a child on their finances, for their less-than-perfect scores.
Credit Refusal: Missed payments top the list for the worst offender affecting credit scores
Your credit file contains personal details including your name, address, electoral roll information, details of any loans, credit cards, overdrafts or mortgages you currently have open and whether you’ve ever been late with a repayment. It also keeps information on accounts closed in the past six years.
Lenders use credit files to ascertain how much debt you have, your available limits and whether you have had any history of bankruptcy and county court judgements (CCJs).
This information is then considered alongside lenders’ own additional affordability criteria to decide whether you are a safe bet to lend to, and what rate they will offer you.
This is Money has taken a look at the top reasons borrowers were turned away, and how exactly they affect your score.
A whopping 73 per cent of those surveyed in the BuddyLoans research said missed payments were the reason their credit rating had suffered.
Every time borrowers miss a payment on a credit card or loan it leaves a mark on their credit file which lasts up to six years.
Lenders want to know that you are going to be reliable and make payments on time each month. Missing a payment can be an easy mistake, but companies may be concerned you will repeat the same behaviour with them too.
If you have a reasonable explanation, it could be worth adding a notice of correction to your file. These can be up to 200 words. And remember you will need to add them to each separate file held with the three main credit referencing agencies – Equifax, Experian and CallCredit.
The more time that passes since your last late or missed payment the less weight companies are likely to give it when making a decision. To avoid any more in future always make sure to set up a direct debit. It can also help to set up an event in your calendar to remind you when bills are due.
No credit history at all
Even those who have never had any problems with debt can find themselves shunned by lenders – just under a fifth (17 per cent) of those polled said they had fallen victim to this trap.
Your credit report won’t take into account any balances you have in a current account or savings pot.
It only looks at accounts you have open and your repayment history, which means if you have never borrowed before you technically have no repayment history and as such may find it harder to get accepted.
Jacqueline Dewey, managing director of credit agency Noddle, says: ‘One of the main reasons someone might not have a credit history is if they haven’t used credit in the UK for six years or more.
‘This is common for ex-pats who have been away for long periods of time. This can also be the case for some older people who own their home and car outright, and who may prefer to pay in cash and avoid credit cards.
‘Additionally, it can also be common for younger people to have little or no credit history.’
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Applying for too much credit too quickly
Of those asked by BuddyLoans, 58 per cent said making multiple applications for credit had worsened their credit rating.
Every time you apply for a credit card, loan, car finance deal or even mobile phone contract, lenders will search your credit file leaving a small footprint.
Too many of these in a short space of time can make you look desperate for credit, which will put future lenders off and make it harder to get accepted.
If you are rejected for credit, don’t panic. Before you start automatically applying for lots of alternative products, take a look at your credit score to get a better idea of why you might have been rejected. It could be as simple as a small mistake which you can rectify.
James Jones, credit expert at Experian, says: ‘Whatever your circumstances, if you’re on the lookout for a new credit card or loan it’s really wise to take advantage of one of the free credit matching services available, like Experian’s CreditMatcher.
‘These will match your credit score to products you’re likely to be accepted for, removing much the guesswork and helping you avoid the frustration and embarrassment of credit refusal.’
MoneySupermarket has a similar eligibility checker tool and some lenders offer their own versions which predict what rate you will be offered.
How good is your credit score? Checking regularly will help you apply for the right products
Side-stepping the electoral roll
Thirty one per cent of those refused credit admitted that not being on the electoral roll had hurt their score, according to BuddyLoans.
Make sure you are signed up to the electoral roll, even if you are only planning on living at the address for a short time.
It’s a piece of advice often repeated by This is Money as it’s one of the easiest ways to boost a failing credit rating.
Lenders use the electoral roll to confirm your name and address. It allows them to create a full timeline of your borrowing habits tracked from each new address.
The generation rent trap
As many as 24 per cent of those asked said they had developed a poor credit rating thanks to living in rented accommodation, while 21 per cent blamed moving house.
Without a good credit score many lenders getting on the property ladder can be impossible, making renting the only option.
Guy Mackenzie, director of BuddyLoans, said: ‘Many people who can afford a mortgage on paper are finding themselves trapped in a cycle of short-term lets.’
While renting in itself doesn’t worsen your credit rating directly, it tends to go hand in hand with lots of changes in your address which can make you appear less stable to lenders.
Mackenzie explains: ‘Having lots of changes of address in a short time frame, particularly if they haven’t registered on the electoral roll, will impact a consumer’s credit score. Lenders might see these applicants as risky, leaving them in a Catch 22.’
If you are going to be moving around a lot the most important thing is to make sure you sign up to the electoral roll, this allows lenders to track your history.
While staying in the same house for a long time means you are statistically less likely to miss debt repayments, a series of short-term lets means changing your address on all of your financial products and closing or shifting all of your utilities.
All of these changes can make it easy to drop the ball – increasing your chances of missing a payment.
Make sure to review the addresses listed on your credit report and any applications you make carefully. Small mistakes, differences in how the address is written or even typos can make it harder for your reference to move along with you.
Changing your name
Surprisingly, 13 per cent of people surveyed by BuddyLoans said they believed changing their name had been the cause for their credit rejection.
Again, changing your name won’t instantly mean a black mark but it can make it harder for credit referencing agencies to track your borrowing history.
James Jones, credit expert at Experian, says: ‘Changing your name can be problematic. Unless you update your details on the electoral roll and with all your existing providers you could find that both credit and ID checks hit the buffers.’
He advises using your credit report as a checklist: ‘It’s also wise to check your report again after one or two months to make sure everything has been updated and, importantly, that the credit reference agencies have recorded your previous name as an ‘alias’. This makes sure your credit score will be calculated using all of your records, including closed accounts under your old name.’
Importantly, a blip in your score after you change your name (after getting married, for instance) doesn’t mean your partner’s financial habits have spilled onto your score, it may just take time for electoral roll information to update so referencing agencies to pick up on the change.
The gig economy
When asked, 14 per cent said their job title was to blame for the way lenders view their applications.
BuddyLoans’ Mackenzie explains: ‘Changes to the way consumers are employed in today’s gig economy, with more flexible working and zero hours contracts, is having a big impact on credit scores.’
A zero hours contract means no guarantee of work or consistent income which lenders can be wary of when making affordability checks as it means a higher chance that you may ultimately default on your borrowing.
Mackenzie adds: ‘It’s much more difficult to provide lenders with proof of income and affordability. Being self-employed can also present similar challenges, particularly for those looking to secure a mortgage.’
With no regular income, bills can mount up easily in quieter months or when work is scarce which can also affect your credit rating should you end up paying late or missing a bill.
Growing family: Having a baby won’t affect your score but changes in borrowing habits might
Having a baby
Eight per cent believe having children has worsened their credit score.
Similar to changing your name, having a baby won’t have any direct effect on your credit file. However the increased financial pressures those with a family face may have secondary effects.
Parents with higher outgoings may rely on credit more, making more applications and using up more of the credit they have available which can affect scores.
As a general guide, experts suggest spending 30 per cent of the money available to you each month on a credit card and overdraft limit. This controlled spending shows lenders disciplined behaviour and proof you can manage your money.
Having children may of course also have an effect on your income. Your credit report only focuses on your debts and it won’t show this information so it won’t worsen your actual score, but it could affect whether a lender classes you as a safe bet to lend to as income affects how affordable repayments will be.
An ex with debts
A tenth of borrowers claim a financial connection with an ex-partner is to blame for a credit application being rejected.
You won’t inherit a partner’s bad score simply because you are associated with them, but if you have any shared finances you could find lenders view you less favorably.
Jacqueline Dewey, of Noddle, explains: ‘Having a financial association with someone – like a joint bank account – is one of the only ways that another person’s financial history can affect your chances of being accepted for credit.’
Lenders can see this link when running a credit search, and are able to view your partner’s borrowing history and vice versa.
Dewey continues: ‘If you apply for credit then the lender may take into account your ex-partner’s credit status too if that account still has both your names on it. If their credit history is poor then a lender may factor this in to whether or not to lend to you. It is, however, the lender’s decision, and this varies from lender to lender based on their criteria.’
While your own financial habits will remain the main focus, lenders may take into account your financial links as their debts could influence your ability to pay when deciding whether to lend to you and at what rate.
A whopping 1.9 million married couples actively keep their finances secret from their partner and more than half of Britons don’t know how many debts their partner has, according to research by credit reporting service Noddle.
So even if you don’t think your ex-partner has any debts, it is a top priority to make sure to close any accounts and pay off any shared debts if you split up.
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