Here's why you get turned down for loans and credit cards

Marianne Curphey

If you’ve been turned down for a loan, don’t panic. Lenders have to follow stricter rules and there are simple ways to improve your chances of being approved in the future. It’s also an opportunity to think about whether you really need to take on more debt, and whether you could find alternative sources of funding.

 

Why you might have been turned down

New rules to prevent people being in long term debt mean that lenders, including banks, building societies, credit card and loan companies, are having to look carefully at their customers’ finances before giving them credit.

More sophisticated software also helps them get a better all-round picture of your financial health. This does mean you shouldn’t be offered too much credit, or given a loan that you can’t afford to pay back. However, it can also mean your application could be turned down if your finances aren’t in great shape.

We look at the most common reasons for being refused credit, and how you can improve your chances of being able to borrow in the future – if that’s the right option for you.

 

The “affordability” test

When a financial services company assesses your application for a loan, mortgage, credit card or overdraft, they have to look at whether you can afford it, based on your other financial commitments.

Many use sophisticated software which identifies something called the Balance Change Sensitivity Index. This assesses what might happen to your overall finances if you took on more borrowing.

Steve Hadaway, VP and Managing Director EMEA of the analysis firm FICO, which provides this kind of software for banks, says lenders are looking at how a customer would cope if they had a change in their credit card balance. Would they be likely to default?

“If a lender gave them credit line increase, what might happen if they spent their limit? It’s to avoid offering credit to people who would struggle to repay,” he explains.

It’s not just about how much you earn – some people on low incomes might be careful and frugal with their spending, while high earners could be constantly “maxed out” on their credit cards.

Instead, it’s looking at how your application for more borrowing fits into your lifestyle. If it looks as though more credit might tip you into unmanageable debt, based on the analysis of your overall finances, then you’re unlikely to have the application approved.

Tip: If you’ve been turned for credit, have a look at your month outgoings. Do they regularly exceed your income? Are there areas where you could cut back or save month?

 

Mortgages

When you are applying for a home loan, your bank or building society will want to know that you will be able to keep up repayments in the long term. They’ll need to assess how you would cope if interest rates were to rise. Some economists are predicting that rates could rise to 1.5% over the next three years, compared to the current rate of 0.75%. While this might not look much of an increase on paper, it would effectively be a doubling of current rates – something not everyone is prepared for.

New rules mean that lender must cap a home loan at four-and-a-half times your income. Lenders should assess how much you can afford to pay each month, based not just on your salary but also your outgoings and household bills.

Tip: If your mortgage application is turned down, you can talk to your prospective lender about why it was refused. Then you can make changes to the amount you want to borrow and to your monthly expenses so that your finances are in better shape for next time. You might not be able to borrow as much.

 

Credit cards

When you make an application for a loan or credit card, lenders will look at your credit file. This is a history of all your financial dealings with credit, including information about store cards, personal loans and car finance. It enables prospective lenders to see what other borrowing you have, and whether you can manage to keep up payments on existing contracts.

There are three main credit reference agencies which collate your personal financial data for banks, credit card and loan companies to use when they assess your suitability for credit. These are Equifax, Experian and Callcredit. Sometimes information is wrong, outdated, or incomplete, which could affect your rating.

Your credit report shows a timeline of your applications for credit. If there are lots of recent applications, whether they are successful or not – it could count against you. That’s because lenders worry that you are on the edge of affordability, and that you could be starting to use loans and cards for everyday expenses such as food.

Tip: If you are turned down, or if you are thinking of making a credit application in the future, it’s a good idea to have a look at your credit file and see what information is held about you.

You can order a copy of your credit file and check it carefully. If something is wrong, you can ask the credit reference agency to correct any mistakes you find. You can also add a “notice of correction” to explain why you were unable to pay a previous instalment, for example because of redundancy or bereavement.

If your application for credit has been unsuccessful, it could be because of previous defaults, worries about affordability, not having a track record of borrowing because you are young or haven’t had credit previously, or simple omissions like not being on the electoral register, which lenders use as part of their fraud and identity checks. If the latter is the problem, you can register at: gov.uk/register-to-vote

 

Personal loan

If you are turned down for a personal loan it is most likely that the lender looked at your credit score and decided that your track record on repayment was insufficient, or that you are close to having more credit than you might be able to afford.

That’s why making sure your credit file is correct, and that you haven’t overcommitted on other loans or cards. In order to get the best deal on loans, cards, broadband and mobile phone contracts, you need to have a good credit score.

When lenders advertise rates and terms for their cards and loans, they will quote an interest rate or APR. Not everyone will be offered the best rates, which are reserved for customers with a great credit rating.

Another issue that could count against you is having lots of dormant credit cards which you’ve not used for a while. These could be old store cards you took out to make the most of a special or introductory offer, or cards you only use for going on holiday or making big purchases.

To a lender, these old cards represent a large amount of potential credit which you could access immediately. Even if you have no intention of using them, they could count against you.

Tip: Close down any unused or dormant accounts you don’t need in order to improve your affordability rating.

 

Overdraft

Borrowing money on your current account can be a good way to cover unexpected costs until your salary or next payment comes into your account.

However, you need to check the terms and conditions of your overdraft, and be aware that if you exceed your credit limit you’ll be subject to high charges and it will show up on your credit file.

Most banks include some form of interest free overdraft as part of their current account offering.

Tip: If you apply for an extension to your overdraft and it is turned down, you can talk to your bank about why that decision was made. As the bank has access to all the information about your daily spending patterns, it’s likely that you didn’t meet the criteria needed to reassure your bank that you could comfortably afford to repay the extra debt.

 

If money worries are building up

In some ways, being turned down for a loan can be a good thing. If you are trying to take on more debt because you are struggling to pay bills and living expenses at the end of the month, then you really don’t want to burden yourself with more borrowing.

Instead, you might benefit from the help of a free debt advice service. They can take a holistic view of your finances and help you come up with a plan to avoid getting deeper into debt:

National Debtline: nationaldebtline.org 

StepChange: stepchange.org 

Citizens’ Advice: citizensadvice.org.uk

Tip: It could be a good opportunity for you to think about your current money situation. These organisations offer free, confidential debt advice.

Do you really need to take on more borrowing? Could you cut back on expenses, switch utility suppliers, shop for groceries at a discount supermarket and give up your designer coffee on the way to work? Small things can help over time.

If you don’t feel you need professional help, but you want to rethink your household budget, you could use a budgeting tool from the Money Advice Service: moneyadviceservice.org.uk/en/tools/budget-planner