Too good to get credit

Posted by Sharon Yewen in Personal Finance on 24 July 2013 - Sharon is Financial Controller at checkmyfile.

It appears that credit card providers are rejecting so called ‘perfect borrowers’ because they don’t fit their secret scoring profiles, some of which are designed simply to maximise profit and filter out customers that are likely to be unprofitable. For example, customers who have historically paid off the balance every month do not make anything like the same amount of return compared to ‘extended credit takers’ for these companies. Even people with clean credit reports and large incomes are being rejected.

The decision is always computer-based and uses ‘propensity scorecards’, that look at a huge sample of previous customers and then work out what mix of attributes are likely to predict a low-return ‘full payer’. The companies use both application form details and credit report data in the assessment process. The formula used by credit card companies is quite dogmatic: applications are assessed by the propensity scorecard in order to maximise profit and many applicants are therefore rejected outright if the details don’t match up to that.

People who are used to repaying the balance monthly are turning increasingly to ‘reward’ cards which offer cash backs, air miles or points. As these cards are not as profitable, applicants are becoming even less likely to get one.

Increasingly no reasons are being given for rejecting applications. In recent research carried out by Which? it was found that 8 out of 10 applications for a card have been turned down since 2011 and given non-specific reasons. Half were told to check their credit file and 3 out of 10 were given no reason at all.

Richard Lloyd of Which? says, ”Credit card providers are letting people down by failing to give them constructive advice after a rejection. We want lenders to give a useful reason for refusal and practical tips so that borrowers can take steps to improve their chances of being accepted in future.”

”We also believe people should be able to shop around for credit without being penalised. We'd like all companies to use quotation searches so people can see whether they may be accepted without a full application footprint being left on their credit file. People should be put back in control of their credit.”

Lenders do have the right to refuse applications for their credit cards ,but this can have a temporary and slightly adverse effect on applicants, as although declines are not recorded on credit reports, recent applications show up on credit reports for up to two years.

Other major reasons for being rejected include incorrect data on the credit file, not featuring on the electoral roll register, accidental or incorrect financial association being assumed, failing to update an entry following divorce, short credit history, or a short time at current address or lack of credit history.

There are always ways for most people to improve their credit rating:

• Don't reapply straight away if you've been rejected for a credit card, as multiple applications within a very short space of time may suggest to lenders that you are desperate or in financial difficulty

• Make sure you’re on the electoral roll as this will increase your chances of being accepted for a credit card

• Pay your bills on time. Missed payments stay on your credit file for six years and will negatively affect your rating

• Cancel old credit cards you no longer use before applying for a new one, as potential lenders may decide you don’t need any additional credit, and having unused credit cards lying about increases your risk of falling victim to identity fraud

• Review your credit report to make sure all the information held about you is up to date. For example, you might still be linked to a previous partner, and if he or she has a poor credit record, this can count against you.

Sharon Yewen is Financial Controller at Checkmyfile. She is an FCA and has a degree in accountancy from the University of Exeter. You can contact Sharon at sharon.yewen@checkmyfile.com

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