What Do Lenders Look For When You Apply For Credit?

Posted by Jamie Mackenzie Smith in Credit Reports on 25 July 2018

Lenders and their appetite for, well, lending, are as unique as the customers they serve. Each one is looking for specific criteria from their target customers in exactly the same way that most of those customers try to select a lender that best suits their individual requirements. That’s one of the reasons you shouldn’t think your hopes of getting a loan rest with your Credit Score alone: you need to think about the context and reasons behind it as well. Each piece of information on your Credit Report – and the sum of its parts – can be interpreted so differently.

What some lenders might find attractive could be a turn-off for others, which means if you do get declined by one, you won’t necessarily be rejected by others - even when they are looking at exactly the same information.

When it comes to keeping your report and rating in good shape though, there are some critical pieces of information that lenders will always pay attention to.

If you’re going to apply for credit, either now or in the future, you should really know for yourself what’s held about you and see what lenders will see. checkmyfile’s Multi-Agency credit report uses data from 4 Credit Reference Agencies, not just 1, making it the most detailed in the UK. You can try checkmyfile FREE for 30 days, then for just £14.99 a month, which you can cancel at any time.

Public information

Before looking at how you’ve managed credit agreements in the past, lenders will check what’s known as ‘public data’, with Electoral Roll and Court Information being the most important elements.

The reason for making checks on Court Records is pretty obvious – lenders want to know if you have had CCJs, a bankruptcy or other debts in the past that have been serious enough to warrant court action. Most records stay on your Credit Report for a period of six years, and while present, will have a serious effect on your ability to get new forms of credit, and will significantly reduce the ‘panel’ of lenders likely to even consider an application.

The second significant piece of public information is the Electoral Roll, and whether you are listed at your current, or any previous address. It can seem like a trivial thing, but it’s actually a key part of how you’ll be assessed.

Being listed on the Electoral Roll at your current address not only makes it easier for lenders to match you and find other information, but also serves as a measure of stability and lenders, as a rule, like to see evidence of this.

Not being listed on the Electoral Roll can be particularly harmful to your credit rating if your borrowing history isn’t particularly detailed. That’s because it reduces the amount of information available to the lender even further, making it harder to assess your creditworthiness.

Your credit history

One of the most important things that a lender looks for on your report is your payment history and how you have managed previous credit agreements. The type of account that can be listed is wide-ranging, and can includes:

  • Mortgages
  • Credit cards
  • Personal loans
  • Car finance
  • Payday loans
  • Some utilities and broadband
  • Contract mobile phones
  • Store cards

The way that repayments have been made each month against every account you hold will be visible and will play a big part in determining how you’ll be assessed.

This is known as creditworthiness and most lenders regard this as the most important information to appear on your report. A squeaky-clean payment history will go a long way to helping establish a good credit rating, whilst late payments or arrears will do the opposite.

Everyone has to start somewhere of course, but without any form of prior credit history you might struggle to find finance.

Your creditworthiness isn’t about how cash-rich you are or what assets you have. It’s about using the information contained on your Credit Report, and in particular evidence of how you’ve managed credit in the past to establish a picture of how you are likely to manage it in the future.

Affordability

Whenever you apply for any form of finance, you will be asked for your annual salary and any regular monthly outgoings as part of the application process. This allows the lender to assess your affordability, working out whether you will be able to afford their repayments on top of your current monthly expenditures (including any existing debts).

While there is likely little you can do to immediately boost the amount you take home each month, making sure that you’re not paying for any goods or services on a monthly basis that you don’t really use will help your affordability in the eyes of a lender.

If you’re tempted to ‘fudge’ your annual income on your next application after being turned down for a loan to give an artificial boost to your affordability, think again as you’re more likely to get a fraud warning marker placed on your file by CIFAS and/or Hunter, which both look for inconsistencies in the information provided in applications in an attempt to weed out fraud. It’s important to make sure you give the same, truthful information to each prospective lender.

For some loans (usually mortgages) the lender will ‘stress test’ your finances to simulate whether you would still be able to keep up with payments even during a period of financial hardship. If you’re named as the guarantor on a guarantor loan, it is likely that this will be taken into account during the affordability checks, with the potential cost of you having to cover their loan regularly also counting towards it.

Open to interpretation

Some information on your credit information, perhaps unhelpfully, can either help or hinder your application, dependent entirely on which lender you have approached. Lenders will give you no indication of what their criteria is in advance either, so the only way you can find out for sure is by applying to them and seeing whether or not your application is successful. Again though, checking your own Credit Report before you apply will allow you to see what they will see.

Missed payments & negative information

Negative information on your credit report is, by definition, negative. But that’s not to say it’s an immediate turn-off to every lender out there. Most lenders should be willing to let the odd missed payment on your report slide, as long as it doesn’t make up a recurring trend that could give them cause for concern.

More serious markers, such as defaults or CCJs are likely to hinder your application with the majority of lenders, but some may take a more lenient approach if they are specifically looking for someone with a less-then-perfect profile. The trade-off is that this type of credit is likely to come with a much higher rate of interest.

Search footprints

Whenever you make an application for credit is made in your name, a Search Footprint is left on your Credit Report, detailing when the search was carried out and by who. Primarily this is useful to you, so you can see if any fraudulent attempts have been made to take out credit in your name. Lenders can also see this information, but in most cases, it will not influence their decision and they won’t be made aware of whether the application was successful or not.

In the rare cases where it does affect their decision, it is usually as a result of there being an unusually large amount of Application Searches in a short amount of time on your file, which could be interpreted as a sign of financial distress. Generally speaking though, the impact that search footprints have on your overall credit rating is overhyped – indeed too few searches can be just as damaging as too many.

Other types of searches are Audit Searches, which usually relate to you accessing your own Credit Report and are not visible to lenders, and Enquiry Searches, which again to do affect your Credit Score and are only lodged to allow you to see who carried out the search.

Other people

While it’s true that your Credit Report is an indication of your credit history and yours alone, if you have had any joint accounts open in the past, the person you shared that facility with will appear on your report. What’s more, prospective lenders will be able to search your associate’s Credit Report as well, and their credit history may have an impact on the final decision.

This can work either way: if your association has a good credit history, it could work in your favour, because if you do fall into financial hardship it shows you have someone financially stable to ask for help. If your association has a history of poor credit, the lender might take this as a sign that you’re the one that might get asked for a bail out.

There’s no definitive answer for how lenders will view a Financial Association, but as a general rule, you shouldn’t keep associations on your Credit Report if the account is no longer active and you’re no longer close to the other person.

Other names

If you’ve ever been married, changed your name or just been victim of a cruel typo, chances are that your Credit Report will reveal this and ensure that the ‘alias’ is there for prospective lenders to see. An Alias is recorded so it’s easier for lenders to keep tabs of previous credit agreements made in another name. This helps lenders and Credit Reference Agencies understand that ‘Julie Smith’, ‘Julia Smith’ and ‘Julia Mortimer’ are all the same person, even though one might be a nickname, one a more formal version and the other a maiden name.

Whenever your name changes, it’s best practice to make sure you inform your existing lenders, so they can update their records and pass the information on the Credit Reference Agencies. Chances are, your names will be linked automatically, but you don’t want to risk it not happening.

Other addresses

Even if you don’t disclose a previous address to a lender, all previous addresses within the last six years (and very often even further back) will appear on your Credit Report and will be visible to lenders, which means if you’ve got an outstanding debt from a previous address, it won’t go unnoticed just because you try to keep it to yourself.

Notices of Correction

A Notice of Correction is in theory your chance to explain to prospective lenders something on your Credit Report that they might otherwise call into question. In reality, it’s rare for lenders to read these, as many people used them to post ‘excuses’ for unpaid debts.

If you apply for credit while a Notice of Correction is present, your application will at the very least be delayed, as it cannot be processed automatically. Whilst lenders are obliged to view it, they are under no obligation to take it into account when making their decision.

Because it’s the data itself that will make or break an application, the more you know before you apply, the better. Indeed, many lenders will check the information held by more than one Credit Reference Agency – particularly when it comes to things like mortgages.

Fraud warnings

For many lenders, a fraud warning on your credit file is an immediate deal-breaker. From their point of view, if they end up extending credit to someone that they later find out has had their details used fraudulently, they are likely to struggle to recover that money.

Fraud warnings can be lodged for a variety of reasons, aimed at protecting both consumers and lenders.

On rare occasions, a fraud warning may be put on your Credit Report in error, which until removed would also affect your ability to get credit. The lender that lodged it should be your first port of call in any attempt to have the marker removed.

How does my credit score affect my ability to get credit?

It doesn’t really. Or rather, not in the way you might expect. Whilst the Credit Score you see when you check your own Credit Report is (depending on where you check it of course) a good guide as to how you compare to the UK average, and how a typical lender is likely to view you, it is not something that is used by lenders. Credit Reference Agencies only provide access to the data, and the decision as to whether to lend or not is always down to the individual lender.

Put simply, only checkmyfile shows you the bigger picture.

You can try the UK’s most detailed Credit Report, with data from 4 Credit Reference Agencies, free for 30 days, then for just £14.99 a month, which you can cancel at any time online.

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