How the banks secretly make decisions about you

Serena Cowdy's recent credit card application was rejected for two very surprising reasons!

A few weeks ago, I decided to buy a new lens for my DSLR camera. I use it in my work as a freelance journalist, and it seemed a good career investment.

Unfortunately, I couldn’t pay the large sum upfront - so I chose to take out a 0% new purchases credit card, and clear the balance before the 0% period came to an end.

Unique criteria

I applied for the Sainsbury’s Finance (with Nectar Card) credit card. It’s a market-leading choice, offering 0% on new purchases for 12 months (plus 0% on balance transfers, with a 3% fee).

Then came the snag. About ten days later, Sainsbury’s Finance sent me my first ever credit card rejection letter. Blurgh.

“We, like many other financial organisations, have our own unique scoring and underwriting criteria, which are used to assess each customer’s application.

“Unfortunately on this occasion your application has fallen outside of our standard criteria, and as a result we are unable to offer you a facility with us at this time.

“You can be assured that this decision was in no way based on any adverse information located on your credit file, and will not have a negative affect on your future credit rating.”

It was reassuring to know that my credit rating wasn’t the reason I’d been rejected; I’d checked it before applying and found it to be good. However, I was still none the wiser about why I had been rejected.

The twist in the tale

The last twist in the tale occurred a couple of weeks after this. Sainsbury’s Finance informed me that mine had been a very borderline case. Because of this, it had been referred to an internal team, to be scrutinised again.

This team had decided they were able to accept me for the card after all. Great! But what nearly went wrong?

Hanging in the balance

I decided to find out which factors had acted to counteract my good credit rating, putting my application on such a knife-edge.

The letter I’d received gave me a postal address to contact if I wanted to ‘discuss their decision’; but it didn’t give a telephone number or email address. I suspected snail mail might take a while, so I approached a Sainsbury’s Finance press contact instead to let me in on the secret behind my rejection. And guess what? The press office was perfectly upfront and able to immediately provide me with all the information.

Anyway, in the end, I was told that two main ‘negative’ factors had acted against me:

1.) As a freelance journalist, I’m self-employed and therefore don’t have a ‘regular income’.

2.) I live in rented accommodation.

Sainsbury’s emphasise that neither of these factors - on their own - mean that you’ll definitely be rejected for their credit card. It seems it was a combination of the two that pushed my application into very uncertain waters.

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A closer look

Let’s look at each of these factors in turn.

The ‘self-employed’ issue is annoying, but not entirely surprising. The lack of a set monthly salary does tend to mean less financial security. For example, if I fail to find work in a given month, I don’t have an unemployment notice period to fall back on.

The fact that my status as a tenant acted against me came as more of a surprise. I’ve always rented my homes, and have successfully applied for several credit cards and loans over the years, with no complications.

In addition, credit card debt (like a personal loan) is a form of ‘unsecured’ finance. This is in contrast to secured or ‘homeowner’ loans - which are secured against your property.

Many people take this to mean that your home won’t be at risk if you default on credit card payments. So why should my tenant/homeowner status be relevant?

In fact, credit card debt and property can be linked by your creditors. A charging order allows a creditor to secure debt against a property you own, even if that debt was originally unsecured.

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Credit card debt can also threaten your home if it forces you into bankruptcy. In this instance, your property and other assets are liable to be seized and sold to pay off your debts. You can find out more about the implications of bankruptcy in Is bankruptcy the answer?

As a tenant, I have no property to seize if I do default on my debts. From this point of view, it makes sense that a card provider would view it as a negative factor.

Clear reasoning

I’m glad Sainsbury’s thought long and hard about my application (irresponsible lending is the last thing we need in the current climate) and their reasons for being wary make sense.

However, it would have been useful if these reasons had been made clear in the first letter I received. It was difficult to predict whether either of these factors was going to be a spanner in the works of my application, because neither was highlighted as an ‘are you eligible?’ factor on the Sainsbury’s Finance website.

Most of us are now aware that applications for credit depend largely on our credit ratings. However, it’s important we know about the other reasons we’ve been rejected, too.

That way, we’re aware of the problems we might face with future applications, and can act accordingly. This one-off rejection might not have had a negative affect on my future credit rating, but repeated rejections almost certainly would.

What you can do

With regard to all credit card providers, it’s important to remember that acceptance isn’t entirely down to your credit rating.

If you’re wondering why a credit card application has been rejected, I suggest you ask the provider to tell you. You might be surprised!

More: 14 very long interest-free credit cards | How to improve your credit rating