Credit ratings are a mystery to most people – a vital component to getting finance yet something most lenders stubbornly refuse to discuss.
It can seem impossible to work out exactly what the problem is with your credit rating and if the decision to decline your application was not expected, it can be even more puzzling.
It’s always a good idea to know what your credit file holds as there may be a small error which is causing potential lenders concern. However, if all is correct, have a look for these simple things to see if you are inadvertently hurting your own credit rating.
1) Get the basics right
Nearly everyone realises that missing or being late with making a payment will hurt your credit rating but there are other fundamental factors which will upset lenders and prevent them delving any deeper.
One of the biggest show-stoppers is not being on the electoral roll. This may not sound like a big deal to you; perhaps you haven’t been in the property long and there hasn’t been an annual reminder sent yet. However, being on the electoral roll is seen as an indication of stability, a sign that you plan to stick around.
As well as being on the electoral roll, providing a landline number will also help lenders breathe a sign of relief, as being in the same job for a while and having a longstanding bank account.
2) Loadsa money!
Rather than holding just one card with a high limit, most modern consumers opt for several cards and use them for different reasons; a cash-back card to earn rewards, a low interest card for balances that won’t be immediately paid off, and so on.
Whilst this is absolutely fine, you should be aware that all of these cards will be taken into account when applying for new credit. You may be under the impression that you won’t encounter any problems as all of your existing cards have low or zero balances but this is just as bad.
Yes, you read that right. Owing no money on your existing cards is just as bad as being maxed out. This is because lenders take into account how much borrowing you have available at your fingertips and will work out what you afford to repay based on your credit cards being at their limit. For this reason, if you have no intention of using them again, close the account – this will give your credit rating a major boost.
3) Red flags
Fraud is one of the things that lenders are particularly hot on checking and if there is any indication of this in your credit file, expect to be declined immediately.
However, fraud is very difficult to detect and scammers are often caught out by the minutest detail that doesn’t ring true. For this reason, if there are signs of inconsistencies on your credit file or previous applications, you could be rejected as the lender is unable to satisfy themselves that you are genuine.
Examples could include such seemingly trivial matters as failing to update your address on an old mobile phone contract or credit card that you no longer use but haven’t closed. Or it could be that you have gotten a bit jumbled over job titles or your career history on different applications. Although you may have no intention of committing fraud, these are the kind of signs which make lenders rather twitchy.
4) Signs that you might be struggling
Lenders have to make a judgement on whether you can genuinely afford to repay what you borrow and to do this they will scrutinise every entry in your credit file to see if there are any signs of what they call ‘financial distress’.
This means they are specifically looking to see if there is any indication that you are struggling and living beyond your means. Examples of this may include a spate of new credit applications recently, lots of increases to existing credit, perhaps being over your limit or being late with payments or even taking out a payday loan.
The latter is very controversial as some customers argue that they use payday lenders if an emergency crops up in the month. However, despite this, some lenders are now automatically declining applicants with a recent history of payday loans because they believe they are a sure-fire sign that money is a problem.
5) Softly, softly
One of the most frustrating things which can impact a credit rating is simply the act of having multiple searches. Unfortunately, some lenders refuse to quote terms unless they have carried out a credit check which means if you want to compare the market, you are going to be put at a distinct disadvantage – and even the risk of getting declined. The good news is that there is another way, although not all lenders are yet offering it.
Rather than performing a full credit search which leaves a big dirty footprint on your credit file, you might be able to have a ‘soft’ credit search instead. This leaves no trace and means you are not compromised if you decide not to proceed with the application. Companies offer this as an alternative to a full credit search as it allows them to provide a tailored quote without stamping all over your credit rating. The details only become registered on your file if you decide to go ahead with the loan.
This kind of check is usually known as a soft credit search or sometimes, a quotation search. Firms may not advertise that they are available so it’s worth asking before you get a price.
Lenders do not hold a ‘black list’ of individuals who cannot have credit and eligibility criteria will vary from firm to firm. It’s always a good idea to apply to a lender who are likely to be sympathetic to your circumstances; if you have a lower than average credit rating, approaching a lender who is known to take a tough stance is unlikely to end with a positive outcome.
Apple Loans for example, offer varying terms depending on your credit rating so may be more suitable for a wider range of applicants. However, regardless of where you apply for credit, taking the above factors into account should help to bolster your credit rating so you can access the best possible rates available for your circumstances.
An article by Samantha Wood, a veteran financial services writer.