Banks and credit card companies are heavily criticised for irresponsible lending and forcing loans on to customers. So it can come as a shock to be turned down for a loan or credit card.
But as banks' bad debts escalate, they are becoming more discerning about whom they lend to, with the best deals reserved for those with excellent credit ratings. Barclaycard, the UK's largest credit card company, recently said bad debts had risen by a third to £696m – more than two third's of the banking group's total level of bad debt.
When a consumer applies for a loan, credit card or mortgage, the lender will calculate a credit score using details from the applicant's credit report and information from the application form. How they calculate the score differs from lender to lender, but there are five common reasons why someone is turned down for credit.
You haven't borrowed in the past
Although this may seem strange, lenders would prefer a borrower to have a history of debts that they have repaid diligently. Jill Stevens, consumer affairs director at credit reference agency Experian, says: 'If you have no track record, they cannot tell how you might behave in future and could mark you down because they have no evidence of your being someone who manages credit well.'
If this is the case, try to build up a rating by putting a small amount of money on a product that is easy to obtain, such as a store card, and make sure you pay it off regularly and on time. Alternatively, if your circumstances mean that you have had no previous need for credit - you may have paid off your mortgage years ago - then explain this to the lender.
You don't fit the lender's profile
As mentioned above, you don't have a single credit score - different lenders will use different ways to work out their scores. A lender will target a specific group of borrowers and you may not fit their profile at that particular time. For example, they may want a particular socio-economic group or age bracket.
Barclaycard's Platinum card is targeted at only those with excellent credit ratings, while online bank Egg typically markets itself at the affluent 20- to 35-year-old market.
Too many searches on your credit report
Every time you apply for credit, the lender will do a search on your credit report that will leave a 'footprint'. Therefore, if you apply for credit from several lenders in a short space of time, it may appear you are building up too much debt, even though you aren't actually taking out the products.
Future lenders could interpret this as meaning that you are desperate for cash, overburdened with debt and even a fraudster using another person's identity to build up credit.
You have had financial trouble in the past
Missed credit repayments stay on your record for three years, so while you may be financially fit today, lenders may take a dim view of your past. If you have had serious financial difficulties and have a County Court Judgment against your name, that will be held on file for six years, while bankruptcy restrictions can remain on your file for up to 15 years.
Credit reference agencies do allow consumers to add an explanation of circumstances to missed payments in their report. For example, you may have lost your job, or you were going through a divorce or had an illness that affected your ability to pay.
You aren't on the electoral register
This is one of the most common, and easily remedied, reasons why people are turned down for credit. Lenders use the electoral register to check you are who you say you are and that you live where you say you live.
For anyone not on the roll, Stevens says: 'The solution is simple: register at once and ensure that you have been taken off the electoral roll at any previous address.' ( thisismoney.co.uk )
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