Consumer credit figures show that about half of all those More than half of the people who applied for some for of credit in 2015 – be that loans, mortgages, credit cards and even mobile phone contracts – had their applications rejected. While it impossible to know why any one person was turned down, it’s probably safe to say that many of those who had their applications rejected had bad credit records.
Financial companies do not apply a single, one-size-fits all credit score when making decisions on whether to lend somebody money. A range of different measures and statistics are used for applications which, when put together, make up a person’s credit record.
The credit record is usually abridged into something called a credit score, which is an easy-to-understand figure that provides a lender with a baseline on which to make a decision. These scores are usually between 300 and 900. If your score is at the lower end of the scale, then the higher the likelihood that your credit applications will be turned down. If your score is at the higher end, then there is a much greater change that you will be approved when applying to borrow money. People whose scores are in the top tier will benefit from the lowest interest rates, the highest credit records and the longer periods over which to repay their borrowing.
Your credit records are available to you just as they are available to lenders and other financial organisations. The three main credit reference agencies – Experian, Equifax and CallCredit – will make them available to you in return for a small fee. They also have subscription options, which allow you to view your credit records online at any time.
If you apply for your credit file or subscribe to one of the online services, you’ll be able to see your credit score. If it is low – somewhere between 300 and 600, then you will probably be turned down for credit by many of the mainstream lenders. This is because something significant means that you are being, in effect, ‘marked down’ financially. Here are the five main reasons why you might have bad credit:
- County Court Judgements (CCJs)
These are top of the list when it comes to bad credit and will, nine times out of ten, cause most mainstream lenders to give you a wide berth. County Court Judgements are made by county courts (which are civil, not criminal, parts of the judiciary) following an application by a lender over a delinquent borrower. These are usually the last resort when it comes to action over arrears or defaults and come when all other attempts to reach agreement with a borrower have failed. When issuing a CCJ, a judge will usually make an order that a debtor must repay the outstanding sum by making monthly or weekly payments. If you have got a CCJ registered against you, then it will remain on your credit record for six years.
If you don’t make an agreed repayment on your loan, then the lender will usually give you a few days to catch up and bring everything back on track. If you still don’t manage to make good the arrears and have not made an effort to discuss the problem with the company, then it may issue you with a default notice. Lenders must issue these when borrowers get into arrears and they advise that certain action must be taken if legal action is to be avoided. Default notices remain on your credit record for six years. They will mean that you will find it difficult to obtain credit from any of the high street banks and will also mean that other lenders give you a wise berth.
- Falling into arrears
If you don’t make a repayment on the date set out in your credit agreement, then the financial organisation will send this information to the credit reference agencies. This will show up when anybody performs a credit search on you. The information will show how late the payment is and how much is outstanding. This is a serious matter and can reduce your total credit score by as much as 100 points – meaning that if you are on the border line anyway, your applications are much more likely to be rejected by lenders. Some credit companies will be willing to overlook a one-off late repayment but once you start falling behind on one or more accounts and when you have a string of arrears behind you, then you will find that your applications for credit will be more likely to be rejected.
- Not registering to vote
When it comes to lending money, one of the first things that a bank or credit organisation will look for confirmation of is your address. This is recorded not the electoral roll – the list of all voters and their addresses held by every council in the country. If you are not on the electoral roll, it can suggest that you are somebody who is trying to evade a debt or financial delinquency and lenders will shy away from you.
- Borrowing too much money
All lenders will want to know how much you already owe before offering you more money. They do this by comparing how much you have already borrowed compared to how much credit you have access to. This is called the debt-to-credit ratio and is worked out by totalling what you owe and then subtracting that from the total amount of credit – loans, credit card limits, etc. – that would be available to you if you ‘maxed out’ everything. A good debt-to-credit ratio to aim for is 43 per cent. So if you have a total credit of £5,000 available, lenders would expect you to have borrowed no more than £2,150.
Article provided by Mike James, an independent content writer working together with technology-led finance broker Solution Loans – who were consulted over the information contained in this post.