As a growing number of loans are rejected because of minor indiscretions, we explain what to do if you fall victim
Some of the country’s high street banks may have returned to the days of bumper profits, but evidence suggests that lenders are taking a tougher line than ever with their customers. Growing numbers of Times Money readers report problems taking out mortgages, credit cards and loans as minor borrowing slips are seized on by lenders to refuse applications.
Indiscretions that would have previously been ignored — a single late payment, for example — can now jeopardise a new loan or card request. This hardline approach suggests that the credit crisis is still far from over for ordinary borrowers, even though the Government has urged lenders to adopt a more welcoming stance.
The postbag for Money’s Troubleshooter column has been bulging with letters from disgruntled consumers who are struggling to borrow money because of a minor mark on their credit records. They are angry because they feel that they are being penalised unfairly for innocent mistakes — others for errors that have appeared on their credit reports.
Even if a payment is missed for a good reason, such as illness, moving house or a holiday, the knock-on effects can be severe. It could even play havoc with existing borrowing commitments, as spending limits are cut.
Banks and credit card companies are cagey about revealing how many applications they turn down. But a telling signal comes from the credit reference agencies, which have reported a jump in requests for credit reports as more people have applications rejected. Equifax, for example, has experienced a 10 per cent increase in requests for credit reports in the past year.
Kate Ness, of Reading, Berkshire, wrote to Troubleshooter after she had a mortgage application declined. Her credit report said that she was a few months behind on payments on a Vodafone mobile phone contract. This was untrue. Though she had signed up for a mobile in February, she sent it back with a letter revoking the contract within the 14-day cancellation period. She says: “At the end of May I put in my mortgage application and it was declined because of ‘adverse credit’, though when I last checked my credit rating, in January, it was excellent. I obtained my credit report from Equifax and found that Vodafone had informed Equifax, and presumably other credit reference agencies, that I have a credit agreement in arrears.”
It was only after Troubleshooter intervened that Vodafone and Equifax agreed to amend her credit record.
Owen Roberts, of Callcredit, another credit reference agency, says: “Alarm bells used to start ringing only when three or more payments were missed. It is almost as if lenders have been gripped by paranoia, meaning that people given easy access to credit in the past are now being rejected.”
Lenders use the reports supplied by credit reference agencies to formulate scores for new and existing customers. If you have an application rejected it may be because you did not reach the lender’s pass mark in its scoring system. Or perhaps there is information on your file that the lender considers to be negative.
Lenders are also paying closer scrutiny to indebtedness and a customer’s ability to meet repayments. The report includes information about existing credit cards, loans, mortgages, store cards and other credit products, and whether there have been missed or late payments. There will also be details of accounts closed in the past six years, plus proof of where you live and how long you have been there.
In December lenders also started swapping more detailed information on credit card customers. The new data-sharing arrangement allows companies to check how much you paid off your last bill, whether you pay only the minimum amount or use your card to withdraw cash and whether you are signed up to any promotional 0 per cent deals.
Lenders say that the aim is to identify people who are most at risk of falling into debt. However, some critics claim that it will be used to crack down on creditworthy but non-profitable customers who use cards only for their perks.
Andrew Hagger, of Moneynet.co.uk, the comparison website, says: “If a credit card company sees that a borrower consistently takes out cards to benefit from introductory deals and pays no interest, there is a danger it will reject an application.”
If you are turned down for credit, you do have the right to ask why. A code issued by the Information Commissioner’s Office (ICO) states that a lender should explain the “main reason” why you have been rejected. However, it is not required to provide details of how its credit scoring works.
It makes sense to obtain a copy of your credit report from one, or all, of the three credit reference agencies — Experian, Equifax or Callcredit. This can be done online or by paying £2 for a copy through the post. Different lenders use different agencies, so the information on the reports may differ. Checkmyfile.com gives unlimited access to your reports from all three for £17.55 a quarter.
If you find an error, you should write to the agency and lender, saying that you want it changed, providing supporting evidence if it is available. The agency will flag this item as “disputed” and consult the lender that provided the information. If the lender accepts that it made a mistake, the agency will either remove or amend the entry. The amended entry should be sent to any lender that has searched your file in the past six months. If you do not receive a response in 28 days, or you are unhappy with the reply, you can ask the agency to add a notice of correction to your file, explaining why you think the entry is wrong.
If you are still unhappy it may be worth taking your dispute to the ICO. Call 08456 306060 or go to ico.gov.uk.
To avoid disappointment there are steps you can take to fix your credit rating and avoid the frustration and inconvenience of being turned down. Lenders will want to be sure that you are who you claim to be, so make sure that you are on the electoral roll.
Banks and other companies will also look at your credit report to find out how much available credit you have at your disposal. If this available credit is too high, lenders could decide that you should not be given more, so close down credit card accounts that you no longer use.
Neil Munroe, of Equifax, says: “On credit cards you should avoid an outstanding balance that is more than 30 per cent of your credit limit. Creditors may view it as excessive debt and conclude that you will not be able to keep up with repayments.”
Shopping around for a new credit card or loan makes sense, but multiple searches leave “footprints” on your file. Too many footprints may mark you out as someone who is desperate for credit or has been repeatedly rejected. Mr Roberts says: “A couple of searches won’t have an impact but ten or more in a two-week period could taint your credit score.”
Joanna Hennessy was turned down for a mortgage after she mistakenly forgot to pay a store card bill. The 36-year-old marketing manager from Leeds was shocked when her application for an Abbey mortgage was rejected, as she had been confident that she would sail through the credit check.
This prompted her to go online to view her Experian credit record, which showed that she had £52 outstanding on a House of Fraser store card.
She says: “When I moved house I wrote to House of Fraser to tell it about my change of address, but it appears that this wasn’t registered. It continued to send bills to my old address, and when I didn’t respond, it put a note on my credit report saying that I was in arrears. It could not have happened at a worse time.”
Ms Hennessy has now cleared the bill and, with the help of London & Country Mortgages, the broker, has arranged a mortgage with Accord.