Seven Out Of Ten Credit Applications Will Be Rejected
Applications for credit look increasingly likely to be declined as the credit crunch takes hold.
This article was first sent to readers as a standalone email in the 'Your Finances in 2012' campaign.
Today many lenders are becoming increasingly cautious, turning down one in two people who have applied for a credit card or loan. But this trend looks set to get worse so much so that by 2012 as many seven out of ten applications for credit will be rejected as a result of the credit crunch.
Until the impact of the credit crunch took hold, credit was pretty easy to come by for most of us. But the mountain of UK personal debt* has now reached a colossal £1,391 billion and continues to rise at an alarming rate. Therefore, to some extent, putting the brakes on lending and providing credit more responsibly should be welcomed.
But the problem is we've grown accustomed to a 'buy now, pay later' culture. If the credit stream dries up this could mean a serious change in lifestyle for many. Worse still, it's a sad fact that some people rely on credit just to make ends meet month to month and will suffer genuine financial difficulty if that reserve disappears.
Request your credit report: Forewarned is forearmed, so your first step is to get a copy of your credit report. A credit report is an account of your personal credit history which lenders will use to help them decide whether to accept or decline your application. If you haven't read your report before you won't know with any great certainty whether you're likely to be considered creditworthy or a credit risk. You can get a free credit report from Experian via The Fool.
Check your credit report: Once you have a copy of your report, check that it's up-to-date and accurate. The report will show all your credit accounts including mortgages, credit cards, loans, and credit agreements held now and paid off in the previous six years.
It will also show whether you're on track with your repayments and whether there are any CCJs (County Court Judgments) against you for failing to keep up. Basically your report will tell prospective lenders whether you're a good credit risk. By the same token, if you have had little or no credit this will probably count against you since lenders won't be able to see any evidence of your ability to manage debt.
Correct inaccuracies: If there are mistakes on your credit report then rectify them as soon as possible. For example, if a credit account isn't shown as being repaid in full then contact the company in question and request that the necessary amendments are made. Be prepared to provide evidence that proves you have settled the account.
Likewise if you have a CCJ which should be shown as satisfied or which you believe is incorrectly registered, contact the County Court straightaway.
Continue to shop around for credit: Shopping around for credit products still makes good sense and can help to reduce your interest bill, but don't forget these days lenders are getting picky and only those with excellent credit ratings with qualify for the best deals. So, to combat this....
....Target your loan application: By choosing a slightly less competitive product you may increase the probability you'll be accepted. My colleague, Neil Faulkner wrote about this in more detail last month so take a look at Up Your Chances Of Getting A Loan. Try your best to avoid getting turned down as each failed attempt will be considered as a black mark by many lenders.
Prove you can manage your debts: Quite simply make sure you repay all your debts in full and on time. If you suffer from the memory of a goldfish set up direct-debit payments to help you keep on track.
Simplify matters: Having debts all over the shop is less appealing to prospective lenders than a few well-managed credit accounts. If you have more than one credit card, try to streamline by paying one or two of them off.
Alternatively you could consider consolidating your debts into one easy to manage loan. But, a word of caution here, in our experience at The Fool many borrowers who take out consolidation loans go on to run up further debts, so only use this strategy if you know you can be disciplined.
Look after your credit score. Even really simple things such as registering to vote at your current address can add valuable points to your credit score. This can make all the difference to a successful credit application.
The availability of credit is certain to get tighter in the wake of the credit crunch. If a 70% decline rate is the shape of things to come then, by following these steps, you'll be in the best possible position for getting the credit you need.
*This figure includes both secured debt (which is usually secured on your property) and unsecured debt which isn't.