According to a recent collaborative study conducted by the Centre of Business Research Cambridge, and Harvard Business Institute, one in three people have no idea what their credit report says and out of those that do know, most of them do not fully understand how credit reports are used and what information is collected. This article is aimed at helping you understand how credit reports actually work and what determines whether a lender will approve giving you the credit you need.
A credit report is an in-depth analysis of an individual, documenting everything about them, their character and their life in general. This means it’s not just your finances that a credit report entails. It also contains details of you as soon as you hit adulthood. Many lenders will not reveal this information to you especially if you’ve been declined credit. This is where credit reference agencies come in. These are the organisations that can give you access to the information you need to see what lenders see when they are deciding to approve or reject you for credit.
Lenders use three to four credit reference agencies to determine your overall fitness for credit. Each credit reference agency has different information about you so using more than three agencies gives them an overall picture of you as the borrower. So what do lenders see that makes them reject you for credit? Here are ten things they take into account.
You are single – Lenders take your marital status very seriously. If you’re single, it means you have no commitments to anything which makes you a high risk borrower. Being married or in a cohabiting relationship symbolizes that you have a commitment and you are trustworthy and you won’t bail out and disappear should you fail to make payments. As a single person you can move anywhere and you can disappear without a trace, so this is a major pit stop for most lenders. The same goes for a divorced person. A divorce in the financial arena means you have lost the ability to maintain a commitment and you are seen as untrustworthy and unable to manage your life and finances. Therefore you are also deemed a high risk customer.
You’re unemployed/ house wife/husband / student – This may sound like total discrimination but lenders need to protect their investments. They need to know that you have the money to pay them back. So unless you have assets, bonds or some sort of security measure, most lenders will close their business to you if you fall in one of those categories. As a student, you have options of student loans. As a house wife/husband, your partner needs to earn a high income and he/she needs to have an excellent credit history with no debts. As an unemployed person, you have no source of money to payback should they lend it to you.
You are under the age 40 – “The older you are the more mature and sensible you can be.” This is the motto all lenders use. As a younger person, you tend to not have a clear sense of good financing and you’re prone to spending more than you earn. So even if you have a good credit history, if you’re below forty years old, you won’t pass this requirement and your credit rating will never reach the excellent mark. The majority of excellent credit file holders are over the age of 40.
Applying to a lot of lenders – It’s amazing how many people are ignorant of this matter. When you apply for credit, it shows on your report. So if you apply to five lenders at the same time, this tells them that you are desperate and desperate people usually have no money to prove that they can pay back. You’re actually deemed as a hazard and lenders will most likely flee from you. If you get rejected by one lender, it doesn’t mean the others will follow suit but that’s highly likely. That’s why it’s recommended that you apply for credit once every six months and if you get rejected, try to not apply again for at least a year.
When you’re frequently searched – As you may or may not know, all your household utility bills are added to your credit file. So if every month you’re frequently searched, it means you have missed payments, you haven’t updated your contact details, you have cut off communication with all your business dealings. This tells lenders you’re an absconder and if they were to grant you credit, they would have a tough time recovering their investment.
Having too many addresses – Lenders want to see that you are a stable person and therefore if you live at an address for longer than five years, then they can accommodate your needs. But if you change your address frequently in a five year period, you’re considered unstable and therefore untrustworthy.
You’re not on the Electoral Register – An electoral register is proof that you have a permanent address and you are eligible to vote in elections. This tells lenders that you have a base, you have responsibilities and you are unlikely to bail out if the going gets tough.
Redirecting your mail – Not many people know this but if you use the post office redirect mail services, this goes on your credit report and seriously lowers your chances of obtaining credit. When you do this, it tells lenders that you are looking for a way to escape not paying back what you owe. Whilst most people who do this are those that are just genuinely moving home but some people use that to run away from creditors they can’t pay.
You haven’t updated your contact details – It’s important to always inform all your business dealings of any changes to your contact details. Failure to do so affects your credit score as this might also seem as another attempt to not own up to your debts.
You have a delinquent or a default account – This means that you have a bill you haven’t settled yet with either a lender or a utility company. This happens especially when you move home or when you go abroad and don’t bother to either close the accounts or settle them before you leave. Default accounts remain on your credit file for six years whether you settle them or not. So when lenders see you have this type of account they tend to reject you as a borrower until you prove that you won’t default on any payments again.
Before you apply for credit, make sure you see what lenders see. Check your credit report regularly and make sure your report is updated. Go to Google and search for credit agencies that serve in your area and request your credit report. Do not apply for credit if you know that anyone of the points above apply to you.