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Your Money > Credit Cards Articles > Beat the barriers...
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By Richard Evans If you have applied for credit and been turned down, it is easy to think "I must have a poor credit rating" and give up. But in fact no one has a single "credit rating" - every lender makes its decisions if a different way, and you have a number of options Lenders typically take three things into account when assessing applications for credit, whether mortgages, loans or credit cards. These are your credit history, the information you provide on the application form and any previous or existing relationship you have with that particular institution. All this information is used to produce a "credit score", which will then determine whether your application is approved, or, in some cases, how much money you can borrow or the interest rate you will have to pay. "We provide lenders with raw data - we don't work out your credit score," says James Jones of Experian, the credit information company. "We keep a record of all your accounts with different institutions, normally going back six years. But the interpretation of the information is down to the individual lender - no two use it in the same way. If one lender says no, another may say yes - no consumer has one central credit rating. The agencies never say yes or no to your application; the decision is always the lender's." Because each lender has its own system for working out credit scores, your score will vary from one to another, even though the information used to produce it will be the same. So if you are turned down by one lender, it doesn't follow that others will do the same. Check your Experian credit report online for free with a 30-day trial of CreditExpert "If you are refused credit, ask the lender why before you apply to others, because there could be something on your credit report that needs attention. However, if you're told that the only reason your application failed was because of credit scoring, trying other lenders is certainly an option," says Mr Jones. The credit agencies also tell lenders about any bankruptcies, individual voluntary arrangements (IVAs) or county court judgements, which will often result in automatic rejection of an application for credit. As well as information about financial affairs, they keep track of whether people are on the electoral roll. Not being registered to vote is sometimes a sign of a fake identity, so lenders can be wary; if you want to improve your chances of being offered credit it is best to make sure that you are on the register. As well as determining whether a bank says yes or no to your application, credit scores can make a difference to the rate of interest you will be offered. "After we've looked at the raw data we receive from credit agencies and the information on your application form, we offer an interest rate that reflects our attitude to risk for the product in question," says Alex Barnett of the Halifax. "This is risk-based pricing - it's a bit like working out an insurance premium." The process is carried out automatically, as the bank processes millions of applications a year. "If we turn someone down, we don't normally tell them why," adds Mr Barnett. "But there are some exceptions. For example, if your employment status was the reason, we will say so and explain that the decision reflects our own scoring system and is nothing to do with your credit file. "But it could be the total amount of credit you have with other lenders, or your payment history with them, that caused our refusal. If this is the case, we will point out that you can get copies of your credit files from the credit agencies and challenge any entries you disagree with, after which you could reapply for your loan. You can also ask us to reconsider, in which case a human underwriter will look at your application, although you must make your request in writing." A similar system is sometimes used for credit cards. If you apply for the "HSBC Card", the "typical" interest rate (which lenders must offer to two thirds of applicants) is 15.9 per cent, but if your credit score is worse than average you may be offered the card on condition that you pay 19.9 per cent, or even 22.9 per cent. If your credit score is worse still, says the bank, your application will be declined outright. Things are slightly different when it comes to mortgages. "The focus is on credit score and affordability," says Jaqualyn Gill of Northern Rock. "Credit scoring is the main thing we look at, in addition to income and other outgoings. Your credit score doesn't affect the interest rate or your eligibility for a particular product, but it can make quite a difference to the income multiple that we are prepared to offer." If you want to take out one of the bank's mortgage payment protection insurance policies, the premium is unaffected by your credit score, says Ms Gill. But default rates on mortgages are significantly lower than on unsecured forms of lending, says James Thorpe of HSBC. "People don't want to lose their homes, so they make sure they keep up the repayments. So you may not need such a high credit score for your mortgage as you do for a personal loan," he adds. As lenders apply their own criteria when making lending decisions, whether for secured or unsecured loans, there are no hard-and-fast rules about the kind of infringements that are likely to cause you trouble in the future. "But missing the odd payment is unlikely to have much effect, although missing them regularly may," says Mr Jones of Experian."And a default - a breakdown of the relationship with a lender - will probably have a significant effect. How much time has passed since the event is also important." Mr Jones is keen to dispel some urban myths about credit records. It is often said that loan applications can be affected by the records of other people who live, or used to live, at your address. "Since 2004 credit reports concern only you, unless you have a financial relationship with other people. This means joint financial activities such as a joint mortgage or bank account; even marriage does not make this linkage automatic. The agencies' databases have been fully updated so this is no longer a problem." Your credit record is also unaffected when you check it yourself, although a record is kept when anyone else, such as a bank, looks at it. As a result, lenders can see how many other applications for credit have been made; a large number in a short space of time may set alarm bells ringing, partly because it may reflect a worsening financial position but also because it can signify an attempt at identity theft. This should not put off those who switch credit cards regularly in search of the best rates or 0 per cent introductory offers. "There used to be a rule of thumb that about six applications for credit a year was okay, but the number may be more now. Frequent applications are less important than before as people are more active with credit products," says Mr Jones. "A glut of applications in a few weeks could indicate financial problems or fraud but consumers are rarely refused credit solely on the basis of number of applications." To guard against identity theft - and to ensure that future applications for credit have the best chance of success - he recommends that consumers check their credit records regularly. "The easiest way is via the agencies' websites. You can ask for a 'statutory' check for a £2 fee; it will be sent to you by post. Or there are more expensive services such as real-time reports over the internet and email alerts of new activity. Check your Experian credit report online for free with a 30-day trial of CreditExpert "When you check your report the first time, read it through carefully to make sure you recognise everything and that it gives an accurate picture of your credit history. If past defaults have been paid off, make sure the lender tells the agency. If there are any entries you disagree with, you can add notes to give your side of the story." Automatic credit scoring systems can't read these notes, he adds, so any applications for credit you make afterwards will be referred to an underwriter for a manual decision. "You should also let the credit agency know if you see anything you disagree with. They will mark the relevant entry as unreliable and contact the lender. If disputes cannot be resolved, the Information Commissioner can get involved, but it's rare. This sort of customer checking also acts as a quality control mechanism for us." Mel Mitchley of Callcredit, another credit agency, recommends some further steps you can take to keep your record in good condition."You should ensure that bills are paid on time and that lenders are kept aware of any address changes," she says. "If you're not using certain lending facilities any more, cancel them - otherwise it could appear that you are exposing yourself to greater debt and you are at greater risk of becoming a victim of identity fraud. Finally, ensure that any applications you make for credit are completely accurate." Useful links
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