It's the letter many of us dread. Our application for credit, whether it's a new credit card, a loan or a mortgage, has been declined.
Why did the lender say no? What do I do now?
I've been there
The first time I ever applied for a credit card, I was turned down. I'd banked with HSBC since I was 12, had kept my current account there all through university, and had just started working as a journalist. I knew that I needed to build up my credit record if I wanted to eventually be able to get a mortgage, and a credit card was a good way to do that.
Having been on the receiving end of countless marketing letters telling me all about HSBC's wonderful credit card, I applied, fully expecting to be approved. After all they'd practically been begging me to take one out, why wouldn't they say yes?
The rejection letter arrived. And I did something stupid. I left it at that. I didn't chase it up, get answers, find out just why I wasn't deemed a good borrower.
Mistakes on the application form
Perhaps the simplest one, and the easiest one to rectify. Make sure you double-check all of the answers you supply when applying for credit. Just guessing at an answer (like how long you've lived at your property) is the worst thing you can do.
If your guess ends up being significantly wrong, then the leader is more than entitled to question whether you are who you say you are.
If you do make a mistake, and that's the reason you are turned down, check with the lender whether they will allow you to correct it and resubmit your application.
Black marks on your credit report
Perhaps the main way a lender decides whether you are a good fit for their product is your credit report. This details any credit accounts you've had in the last six years and how those accounts have been managed.
In other words, if you've missed a payment – whether it's on your mobile phone bill, your credit card or your mortgage – it will be on your credit report.
How important that black mark will be really depends on what credit you're applying for. If it's a one-off and you're not applying for a top of the line deal (say an 18-month 0% balance transfer card) then it might not hurt your application.
But if there's a couple of missed payments on there and you're after a market-leading deal or rate, then it could spell disaster.
To see your credit report and get an idea of how your application will look to lenders, you can get a free trial with Credit Expert via Lovemoney.
You're not on the electoral roll
Fraudulent applications for credit are a daily issue for lenders, so they take a number of steps to establish that the person applying really is who they claim to be.
One of the ways they do that is to check your registered address against the electoral roll. If you don't show up, they may be wary about lending to you.
Head over to About My Vote to make sure you're registered to vote. It could make all the difference!
Mistakes on your credit report
Your credit report is not automatically correct though. Mistakes do happen – perhaps you were the victim of identity fraud, or there was a mix up over a late payment. But that mistake, sitting uncorrected on your credit report, could impede you from getting credit in the future.
If you check your credit report and spot and error, you can correct it. The first step is to contact the lender who made the mistake. They should be able to take action, but if they don't make sure you raise the issue with the Financial Ombudsman Service. Read How to complain to the FOS.
Alternatively, you can contact your credit reference agency (Credit Expert, Equifax, Callcredit, etc) and ask them to raise the issue with the bank on your behalf.
Finally, there's the option of a 'Notice of Correction'. It's a short explanatory note, of no more than 200 words, which you can add to an entry on your credit report to give some background to the information. It will show up any time someone searches your report in the future and mist be taken into account if you apply for credit.
It's worth contacting all of the credit reference agencies about a Notice of Correction, rather than just one.
Too much credit
How much credit you already have at your disposal also plays a part in a lender's decision. Sure, you may be managing your credit fine at the moment, never spending more than £1,000 a month on your card.
But if you have two old cards at the back of the cupboard that you never use, but which you haven't closed, each with a £10,000 credit limit, then you've got a lot of potential credit already at your fingertips. Why would a lender want to add to that?
Make sure you get rid of any cards you don't use anymore!
Applying for the right product
When a lender advertises a credit product, they will include information about the type of borrower they are targeting.
For example, Barclaycard makes clear that its 25-month 0% Platinum balance transfer card is only for borrowers with an "excellent credit rating". American Express meanwhile asks that applicants for its Platinum Cashback credit card have a permanent UK home address, a household income of at least £20,000, no history of bad debt and if they are self-employed, they must have been working for more than one year.
So before you go through the hassle of filling out an application form, make sure that you tick all of the boxes of the borrower the lender is looking for. Otherwise, you're just wasting everyone's time. And you're also going to damage your own credit report in the process...
Been refused credit before?
It's a bit of a vicious circle but being declined a credit card can actually damage your chances of getting a different form of credit in the future.
Every time a lender checks your credit report when making a decision on your application, they will leave a footprint on your report. It doesn't say whether they approved the application or not, merely that they checked you out.
If you were declined credit from one lender – perhaps because you didn't meet the criteria for the credit card – and straight away went out and applied for cards from three other lenders, suddenly your report has an awful lot of footprints on it. And that could be viewed as a sign of either financial difficulties or fraud, neither of which sounds all that attractive to a lender.
If you do get turned down, make sure you ask why. If it's an error on your report, get it fixed. And if it's an error on your part, make sure you learn from it and don't repeat it.
It can take a long time to build up a perfect credit record, but it doesn't take long to damage it!