The 2021 Credit Score Guide – Chapter Ten
Unfortunately, life doesn’t always go the way we plan. And never is this more true than when it comes to financial planning. Often we count on borrowing to realise our personal or professional ambitions. When a credit application is turned down, it can be both upsetting and frustrating. This chapter will help you understand why you were refused for credit and what you can do to increase your chances in future.
- Why credit might be refused
- Find out why you were rejected
- Checking your credit file
- Re-evaluate your finances and pre-existing credit
- Don’t make multiple credit applications
- Doing your research on financial products beforehand
Why might credit be refused?
In March 2017, BuddyLoans did some research and asked consumers why they thought they’d been turned down for a credit card or personal loan. Possible reasons for their rejection will be an eye-opener if you find yourself in the same position. What did they believe?
- 73% previous history of missed payments
- 58% multiple credit applications had left a footprint on their file
- 40% poor credit history
- 30% not registered on the electoral roll
- 24% in rented accommodation
- 21% history of short lets because in rented accommodation
- 17% no credit history
- 14% employment history showed lack of stability (such as zero hour contracts)
- 13% change of name (which made it difficult to track previous credit history)
- 10% financial association with former partner still on credit report
- 8% having new baby (with changes in earnings)
What can we learn from common reasons for rejections?
You should bear in mind that would-be borrowers themselves are giving their opinion about why credit was refused. For this reason, they might have supplied more than one possible explanation.
However, it might help you to understand why you were turned down and give you ideas about rectifying the situation so subsequent applications will be approved. Steps like registering for the electoral roll can be done online in a matter of minutes and require no special expertise. Now, let’s focus on the measures you should take after an unsuccessful credit application.
Find out why you were rejected
Good lending practices mean that financial institutions should tell you if your credit history has played a role in their refusal and which credit reference agency they consulted. If this is the case, your first step should be to obtain a copy of their data on you.
Checking your credit file
Ideally, you should have checked your credit report before you made an application for new lines of credit. However, if you didn’t, now is the time to do so. You can check your credit report for free or request a statutory copy of your credit report (which costs £2) from each credit reference agency, which you normally receive by email or by post by supplying your personal details.
Once you have a copy, go through it with a fine tooth-comb. Make sure that all the information about your credit history is correct any inaccuracies either with the agency or by contacting the lender who put them on your file. Make sure that previous financial associates (such as ex-partners) aren’t linked to your credit file.
Check that all financial institutions have up-to-date information about you, especially your address. Inconsistencies about your address could raise a red flag through fraud scoring because of the risk of identity theft. Once your credit report is in order, what should your next step be?
Re-evaluate your finances and pre-existing credit
Don’t panic if you’ve been refused credit as you aren’t alone. The research by BuddyLoans found that 1 in 5 applications for a credit card or personal loan are turned down. Instead, think of your rejection as a wake-up call and use this as an opportunity to re-evaluate your financial decision-making. Think about how many debts you already have and your existing access to credit. Be brutally honest – what you lend yourself money based on the data on your credit report?
If the answer’s a resounding ‘No!’, start getting your financial affairs in order. Put a family budget in place and stick to it. For a period of 3-6 months, keep your spending to a minimum and concentrate on paying off some of your debts without borrowing more.
Such measures will improve your credit rating and make lenders more willing to approve your next credit application.
Don’t make multiple credit applications
The worst thing you can do when you’ve been turned down by a bank is to panic and start applying to other financial institutions in rapid succession thinking that one will approve you eventually.
Every time you apply for credit, the resulting credit search remains on your file for future lenders to see.
However, if you need cash for an emergency, you can apply for pawnbroker loans because often pawnbrokers carry out less credit checks than an online lender, leaving less of a mark on your credit file. You can also try apply for loans for bad credit from a direct lender. Although these are easy to obtain, they are expensive and should only be used in emergencies.
Every time you apply for credit, the resulting credit search remains on your file for future lenders to see. Too many credit applications in a short period of time can be a warning sign for would-be lenders and have a disastrous impact on your credit rating as you seem desperate. Instead, wait at least a couple of months before re-applying. Apart from checking your credit file, how can you improve the likelihood of being approved credit?
Do your research on financial products beforehand
Every financial institution has an idea of their ‘ideal’ borrower and you might not not fit this profile. This has nothing to do with how good your credit score is but concerns their lending criteria. Before applying for another financial product, do your homework. Find out the restrictions they impose. For example, there might be a minimum age or salary for a certain loan or credit card.
You could also make use of eligibility tools on the websites of most debt advisory services. Not only can it tell you if you meet the lender’s requirements but they might be able to recommend financial products from other institutions which are more suitable for your circumstances.
What to keep in mind if you’ve been refused a financial product
Being turned down for a financial product might be a blow but it isn’t the end of the world. Use the rejection as the chance to check your credit report and analyse your money management skills and spending habits. Give it some time and research the market for the product you want. Such simple steps can improve your chances of making a successful application next time.
Questions on being refused a financial product
There are many ways to approach the rejection of a loan application. Depending on your circumstances and particular needs, you may have to take specific steps. In general, however, the best starting point is to determine why your application was rejected, to help you make sure that your next application is successful. In your next application, consider using collateral or a cosigner. Alternatively, you may offer to make a larger down payment, or apply for a loan elsewhere.
The rejection of a loan application that you filed with a lender will not directly impact your credit score. It will not appear as an item on your credit report. However, the fact that you applied for credit will appear on your report, and will have an impact on your credit score.
If you have been denied a financial product, it is widely recommended that you wait before reapplying for a loan or credit in general. While there is no specific rule about how long to wait, it is recommended that you wait six months, if possible, with particular regard to credit card applications.