- Explain Why You Get Turned Down For Credit
- Give 3 Simple Ways to Improve Your Chances
- List Credit Products which May be More Suitable or Have Higher Levels of Acceptance
Why is it Harder to Get Credit Nowdays?
It’s a fact that loans are harder to be approved for today than they were several years ago. Before 2008, lending was a lot looser, criteria wasn’t as tight and lenders were more willing to take risks. However, the credit crunch changed this and forced lenders to tighten criteria and raise prices to shield themselves from any bad debt losses – essentially as the economy declined, so did the number of loan approvals. Still, the reasons for being turned down remain exactly the same… it’s just the rules behind these reasons are stricter.
Reasons For Being Turned Down
Whenever you apply for finance such as a loan or credit card, the lender will profile you to determine whether you are a risk or not. This is usually done by performing a credit check, an electoral roll check and also taking into consideration the information you have provided about your current employment and situation. These checks vary from lender to lender, as to the conclusions they draw from them. Most lenders will perform these checks automatically and a computer will generate a credit score for you based on it. If your score is above the level the lender has set for an approval, then you’ll be accepted, if not then you’ll be declined. Luckily there are now loan and credit products which skip or reduce the amount of credit checking done.
What is the Score Based On?
Lenders will create their own unique score based on the information they have about you. Your credit history (or credit record) holds the details of all previous credit you have taken out, how much you’ve repaid, whether you’ve missed any payments, and so on. Most of your score will be based on how you’ve managed your previous credit, but other factors are also taken into consideration.
Your Credit History
Your credit history is exactly as it sounds; a history of your credit. All the credit you have possessed is reported to and logged by credit reference agencies (the main ones being Experian and Equifax). When you apply for a loan, lenders request this information from the agencies to help form a decision on your application.
Below is a list of the main factors from your credit history which may lead you to being declined;
Too Many Applications
Usually, every time you make an application for credit the lender will perform a credit search on you. This is marked on your credit record and if you’ve made a few applications for credit recently, a lender may see this on your record and take a dim view. It seems pretty unfair that a lender will turn you down just because you’ve applied and also been turned down by too many other lenders recently, and largely it is. The reason behind it as viewed by most lenders is.
a) It might show you are “desperate” for a loan, which is seen as a risk
b) There is a possibility you may have been accepted for one of these loans (but this hasn’t yet been marked on your record), and so the lender can’t make an accurate affordability assessment (see Employment section) of your income and outgoings.
Missed Payments
If you’ve ever missed payments on your previous borrowing, then this immediately starts to trigger sirens for a lender. If you’ve missed one payment many years ago, then it’s probably won’t make a difference, but several missed payments, in your more recent past especially, may affect a decision.
If you missed more than 2 payments in a row, a lender may mark this as a default on your credit history. This is a flag which stands out to lenders to tell them that you missed several payments in a row.
Too Much Credit
If you currently hold a lot of unsecured credit, then this will also be flagged. The lender may wonder why you’re looking to borrow more and will take into account your current repayments to determine whether you can afford to maintain them (along with the credit you are applying for) based on your wages.
Too Much Potential Credit
Even if you don’t currently have a lot of debts, you may hold several credit cards which you could borrow on. Say for example you have 3 credit cards, with no borrowing on each, but with a credit limit of £5,000 on each. That’s £15,000 worth of debts you could take on after taking out the loan you’re currently applying for. This is seen as another potential risk.
County Court Judgements
A CCJ can be placed on you for a number of reasons. Common ones include missing your council tax payments or missing many payments on unsecured debt. A CCJ is a handed out by a court to demand you to repay your debts, however it is also marked on your credit record and is a big indicator to lenders that you’re a risk. This is especially true if the CCJ is in the last few years.
Financial Associations
If you have taken out a joint loan with someone or perhaps have a mortgage with your partner, then they will be marked on your record as a ‘financial association’. If any of your financial associations has problems with their own credit record, then this may also cause problems for you. Although this isn’t usually a major factor.
Electoral Roll
Another search carried out by lenders is to check your local electoral roll to see if you are registered at your current address. If you’re not, then lenders will highlight you as a big risk. The reason for this is that many fraudulent loan applications are made by people who don’t actually live at the addresses they’re applying from, or if they do live there, they don’t intend to stay there, so aren’t on the electoral roll. However, if you’ve recently moved and haven’t registered yet, chances are you won’t be on it – so make sure you are before applying for any credit! Usually it takes a couple of months to appear on the register after submitting the form.
Contact Details
This is not one to be underestimated. If you apply for a loan, but only provide one contact number, you will stand less chance of being accepted as you would if you supplied 2 or 3. The reason for this is quite simple; the more numbers you give, the more chances a lender has of getting in contact with you should you miss any repayments. Therefore you are given a higher trust score.
Supplying a land line number is the most important. Lenders consider people who have landlines to be more secure and unlikely to move away. This may be a little archaic now days, but it’s a formula many lenders still use.
Current Situation
There are a number of important factors taken into consideration based on your current and historical living and working situations. We’ll go through them below;
Employment
Your employment is a fairly big consideration for lenders. The less time you’ve been in your current job, the more of a risk you are deemed. Someone who has been at the same employer for 20 years and is earning a decent wage is much more likely to be accepted than someone who has switched their job several times in the last few years.
Another key factor is your salary. If the lender calculates that you don’t have enough disposable income to afford the loan repayments (in their eyes at least), then it’s a big negative for your score. Disposable income is calculated differently by each lender, usually something similar to below is used;
2 x kids = minus £50 each
Rent payment = minus £500
Council tax payment = minus £100
Food Bills = minus £150
Clothing = minus £50
Disposable Income = £100
In this example, if your loan repayment was to be £70 per month, that might be considered too tight and you may be declined. If a lender hasn’t asked you for some of the outgoings listed above, they may use their own generic figures to make a calculation (e.g. take £50 costs away for each dependant child you have per month).
Residency
Similar to employment, if you’ve lived at several addresses in the last few years, this will give you a lower score than someone who has lived at the same house for 20 years. Essentially, if you move about a lot, then it’s easier for a lender to lose contact with you and so you’re a higher risk.
Your residency type is also quite important. A home owner is usually classed as a lower risk than a tenant or someone living with their parents for example. Likewise a tenant is a lower risk than a lodger, simply because a lodger can ‘vanish’ easier than a registered tenant.
How Do I Get Accepted?
If you keep getting declined for credit, it ultimately boils down to three reasons;
1) Your credit score is too low
2) You’re applying for the wrong type of or too much credit
3) You haven’t supplied the right information
Luckily, you can fix all the problems above.
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Improving your credit score is the most time consuming, but should eventually give you access to more credit products and lower interest rates.
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Changing the type of credit you’re applying for is the quickest solution and could actually help you to start improving your credit history at the same time!
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Supplying the right information is a factor you need to consider when applying for any loan. Make sure you supply all your available contact numbers (especially a land line number). Don’t lie about any of your details, but ensure they are accurate. For example when asked how much credit you have outstanding, sit down and work it out; remember, the lender can find this out anyway, so be honest. Also don’t apply for more than you can afford; if you apply for a loan with repayments of £300 a month, but you only have £200 spare cash each month, then it’s unrealistic and you’ll be declined. Instead think about what you need the loan for and how much you need to accomplish it… don’t go crazy and apply for too much.
What Should I Be Applying For?
Loans
If you have been declined elsewhere and are looking for a fixed term loan of up to £5,000 with competitive rates, a guarantor loan could be the solution for you. The concept behind a guarantor loan is simple; you provide a friend or family member to vouch for your loan (this person is the guarantor), their trust for you is then taken on board rather than relying on an automated credit scoring process (which is usually the reason why most people are declined for a normal loan). If you’re interested in finding out more or applying, you can do so here. This is a good option if you’re looking to pay down existing debt or perhaps make a larger one off purchase (e.g. home improvements).
Credit Cards
If you’re looking for a credit card, then there are several “credit re-builder” cards on the market offered by companies such as Capital One and Vanquish. These cards are aimed at people will poor credit records and if you maintain re-payments could also help you improve your credit record. If you’re looking for flexible finance to make purchases then this may be a good option for you.
Other Debt Solutions
If you’re in a lot of debt and are just looking for a loan to consolidate it, you may be better looking at other debt solutions. The government backs a solution called an IVA, which is aimed at people with over £15,000 of debt; it allows the debtor to repay their debts within 5 years by making an arrangement with the lenders to pay a fixed amount back within that time. You can’t take out any more credit whilst you are in an IVA and it will leave a mark on your credit record afterwards, however it could be a good solution.
You could also look at debt management solutions. This is where you or a company (acting on your behalf) makes an arrangement with your lenders to freeze your interest (where possible) and pay back a specific amount of money each month. This usually means you end up with lower repayments, although your debts can take longer to repay. If you use a debt management company for this, they will usually take one monthly payment from you and make payments to your creditors. This is usually a much simpler method than paying each creditor individually, but it’s worth bearing in mind that debt management companies will take a fee for this (usually a monthly percentage of your repayments).
If you’re struggling with debt, take a look at our help centre for further resources and organisations you can contact to get help and advice. You can also find out about other types of credit.
PS. If you apply for one of the solutions above, make sure that you supply the most accurate and honest information you can. Don’t forget those contact details!