As anyone who has ever tried to figure out why they’ve been declined for a loan knows, deciphering just how banks and other lenders decide to grant credit can be quite confusing. This guide will explain some of the finer points of what goes into making up your credit report, how that information is used and what you can do to better position yourself to get a loan or other credit. We’ll even discuss alternatives for those who simply aren’t able to receive credit on their own.
Ironically, lenders are not required by law to tell you what your credit score is when they refuse you, or even give a detailed explanation. However, they are required to tell you which credit reference agency they used when deciding to deny your application for credit. This is a valuable tool for you to use, as you can then obtain a copy of your credit report from any of the credit reporting agencies. Because some will have different information on you, you should check them all. That way you can try to find a lender that uses whichever of your reports has the most favourable information. By doing that your chances of being approved for a loan will be much higher.
Here’s a list of things lenders consider when deciding whether to approve or deny your application for credit:
1) Credit Reference Reports: This is a list of information the credit reference agencies keep on file, and it’s fairly comprehensive. All sorts of information about a potential loan applicant will be shown, including the following:
• Account Information: Any active account payments you have will show here, including things like your bank accounts and overdraft usage, borrowing habits, and any late payments or delinquencies you may have had.
• Electoral Roll: This is a list of the addresses you’ve used to register for voting. If you aren’t registered, you should do so, as it’s one reason a mortgage can be denied.
• Financial Associations: This will show anyone you are financially connected to, such as someone you may have jointly applied for a loan with, or acted as a Guarantor for.
• Home Repossessions: If you’ve had any action against you involving a home repossession, the Council of Mortgage Lenders will report it here.
• Linked Addresses: Anywhere you have ever lived will generally be shown here. Usually this information is cross checked by the credit reporting agencies using the information on your Electoral Roll, so it’s important to keep that information up to date, and remove any addresses that don’t belong. Don’t forget to also update your address with HM Revenue & Customs.
• Previous Searches: There are soft checks and hard checks with the credit reporting agencies. Generally speaking a soft check is just to verify your information or identity, and a hard check is when you are actually applying for a loan. Soft checks do not show up, but hard checks do show up and can stay for up to 12 months.
• Public records: Depending on where you are in the UK, this will show information on any Bankruptcies, Debt Relief Orders, Decrees, Judgments and similar financial actions against you.
As a general rule, all of this information will remain on your report for up to six years, excepting the hard checks, which are there for not more than 12 months. The only exception to this is if the court has ordered that something like a bankruptcy restriction remain on your report for longer, in which case it’s up to the courts and there’s little you can do about it.
2) Dispute Inaccurate Information: If you find that any information on your report is inaccurate, you should file a dispute. A dispute is filed by contacting the agency reporting the inaccuracy. In the case of simple errors, such as an incorrectly reported address, you can usually quickly fix it. For everything else, it’s not an easy or fast process. In most cases can take weeks or more to correct. This is because you will need to show proof that the information is incorrect, and then the credit reporting agency in question will contact the debtor to confirm their details. However, as reported by the Mirror, this is a critical part of improving your credit ratings, and not something you should skip. Just keep in mind that you can’t have something removed simply because you do not want potential creditors to see it. You can add an amendment to items though, such as listing a debt as satisfied when the debtor can’t be contacted or won’t confirm that you’ve satisfied your obligation. It’s worth mentioning though that this can sometimes backfire, as a debt that might fall off your credit report in two or three years could end up sticking around longer when you add information to update the file. Because of this it’s always best to talk to a debt counsellor before making any amendments yourself.
3) If You Can’t Get Credit: Some people are just unable to get credit. This can be for a range of reasons, from simple things like having far too many addresses in a short period of time – which is common for students, to more serious matters like credit defaults and home repossessions. In such cases the only way you will receive credit is with a security, such as home, a car, cash in a fixed deposit, or other valuable asset. The only other alternative is to have a Guarantor. The problem with that is that you not only need the Guarantor to be financially secure enough that their credit will support you, but also need someone willing to be financially linked to you through the credit reporting agencies. Your spouse isn’t generally allowed to act as a Guarantor for you, so it needs to be either another family member, or a close friend who is willing to take that risk.
As a general rule, lenders look at much more than your information with the credit reporting agencies, but much like looking for a job, if you don’t have good enough credentials, they won’t waste the time to perform the rest of the checks. This is because of this your credit information is no different than your university degree in terms of getting the credit you want. Not having good information means you won’t even get in the door to explain what a great loan candidate you are.