If you have been turned down for a loan or other form of credit, you are probably wondering why.
Many people believe that if you have been denied credit, it is because you have been ‘blacklisted’ and have a poor credit score or rating. Fortunately, however, both beliefs are no more than urban myths. There is no such thing as a universal credit black list, and no one has a single credit score that is referred to by all lenders.
You may be turned down by one lender, but that does not mean that all other lenders will also reject any applications you make to them for credit. Similarly, although one lender might give you a low credit score, other lenders will use different criteria when they evaluate your application and so will not award you with the same score.
Poor Credit History
If you have a poor credit history, however, you are likely to be rejected by most lenders who will see you as a bad risk, and this is how the common misconceptions of being credit blacklisted or having a low universal credit score arose.
Bad Borrowing Rather Than Bad Credit
Lenders are always concerned about how reliable a borrower you are. In other words, can they trust you to repay the money they lend you? In order to make a judgement, the lender will, when you apply for credit, request your credit record or file from one of the three main credit reference agencies. These agencies are Experian, Callcredit and Equifax. Each of these hold information about you and your borrowing history. If you have missed repayments on previous loans or even paid them late, this information will be passed on to the lender, who will have to decide whether or not you pose a risk to them. Having evaluated all the information they hold about you, they will award you a credit score or rating. The criteria each lender uses will vary, and how they award the score varies too, which is why a low score with one lender will not always equate to a low score with another. However, a history of missed or late payments will always count against you. Similarly, being declared bankrupt or having a County Court Judgement against you will adversely affect your credit rating, as will having entered into an Individual Voluntary Arrangement (IVA).
You might be surprised to learn that your credit rating will also be affected if you always pay the minimum amount on your credit and store cards every month. This is because lenders tend to assume such behaviour means you cannot afford to pay back all the money you owe.
Always remember that if you are finding it difficult to pay back your debts, it is very important that you contact your lenders to discuss the situation with them. It is much better to let them know that you are struggling than to miss payments with no explanation.
Other Reasons for a Low Credit Score
Ironically, those who have never borrowed any money often find that they too have been given a bad credit rating by a lender. This is because they do not really have any credit history to show the lender, who will consequently be unable to judge whether or not they pose a risk or can be trusted to repay their debt.
Likewise, those who use a credit card but always pay off the full amount each month may find that they too have a low credit rating. This is because lenders prefer clients who will make them money by paying interest on the money they have borrowed.
Always Ask Why
If you have been refused credit, you should always try to find out why. Most lenders will agree to give you a broad reason for their refusal if you ask. You are entitled to appeal against their decision if you feel you have been treated unfairly.
It is best to avoid applying to another lender for a loan or credit immediately after being turned down. Take steps instead to rebuild your credit score. This is because unsuccessful applications will show up on your credit history, ringing alarm bells for potential lenders.
Having a low credit rating does not mean you will be unable to borrow again. Evolution Money, for example, does not base its decision to lend money to you solely on your credit history but takes a number of other factors, such as your monthly income, into account too.