Been turned down for a loan? Sean Coughlan explains the intricacies of creditworthiness
I used to live near a shop which must have had the world's largest collection of naff signs behind the counter. You know the ones I'm talking about: "You don't have to be mad to work here, but it helps." Really hilarious stuff.
A particular favourite of mine was "Don't ask for credit because a punch in the face often offends". Setting aside the punch in the face, getting turned down for credit does offend. If you've applied for a credit card and been rejected, it can feel as though you're being labelled as untrustworthy.
So how do credit card companies decide who to accept and who to refuse? If you have a good credit history and a secure, salaried job such as teaching, why would they turn you down? And what happens if you think they must have false information about you?
The main method of assessment is "credit scoring". Each credit card will have its own formula, but the basic principle is to award points according to the results of 20 or 30 questions. These look at how much you earn, where you live, how long you've been in your job, how long you've been at your current address, whether you're a homeowner and how much you're paying out on other debts. If your score shows you to be a low credit risk, you cross the winning line and get a card. It's like working out the odds on a horse race, with the credit card lenders assessing the risk of giving someone credit.
But even if you have a steady income, this might be outweighed by negatives, such as not being on the electoral roll because you've just moved or if you're already overloaded with debts.
A key piece of information likely to be checked by every credit card company considering an application is the "credit reference". Anyone who has ever had a loan, mortgage, store card or credit card will have a credit reference file, which holds details of all your borrowing. When people warn you against getting a bad credit history, this is where the lenders find out where the bodies are buried.
If you forgot to pay off the payments on the sofa for a couple of months, it'll show up on your file. If your credit card had a post-Christmas hangover and you struggled with the repayments, it'll be here.
As well as holding your credit history, the credit file will also have details of anyone with the same surname living at the same address. So if a relative living with you has debt problems, the lenders will have that information as well.
This might seem Big Brotherish, but consumer credit is big business and the stakes are high. In a single month, we splash out pound;8 billion on a range of 1,500 types of credit card. And even if only a small percentage of cardholders default, it still means a huge amount of money.
Credit card companies don't hold their own credit references; they use independent agencies. The biggest of these are Experian and Equifax, which hold files on about 44 million people at about 25 million addresses.
The good news is that under data protection legislation anyone can see their own file (if you send a cheque for pound;2). This is quite simple and I've tried it myself - you get a print-out which is like a This is Your Life of borrowing. Instead of a kiss and tell biography, this is a beg and borrow account, with intimate details of credit cards you've forgotten and mortgages for addresses that you've left behind.
You can appeal to have an entry changed if anything in these files is wrong. If this remains in dispute, you can add a 200-word note putting your side of the case or explaining any special circumstances.
After all, credit where credit's due. Or as they might say on those shop signs: "As long as you're aged over 80 and you're accompanied by both parents."
firstname.lastname@example.orgExperian, Consumer Help Service, PO Box 8000, Nottingham NG1 5GXEquifax, Credit File Advice Centre, PO Box 3001, Glasgow G81 2DT