Credit rating system
Lenders use a credit rating system to establish whether or not a loan applicant has a sound financial history. They need to establish how much of a risk there would be in lending an applicant the money.
Credit check
Applying for any type of financial product will result in a detailed credit check. Questions will be asked – Is the application sensible given the income and outgoings of the applicant?
Credit reference agencies
The lender will probably use one of the two major credit reference agencies, Experian or Equifax. These agencies hold a wide range of information on everyone with a financial history, and have a formula for grading good or bad credit risks. They will have records on file of any past problems such as debt, and late or non-payment of bills. One of the things taken into account in the grading system is current address. Unfortunately, if an address is shared with somebody with a poor credit history, that will count against the applicant.
Other ways that a loan applicants profile is assessed
Credit reference agency files are only a component part in the system used to decide if a loan applicant is a good risk. Equally significant are in-house credit scoring systems. It is vital for a borrower to have their name on the electoral roll, and it needs to have been there for at least a year. Moving house more than a few times in any 3 year period can have an adverse effect on the credit score.
Only apply for a loan if it is a safe bet
It is advisable for borrowers not to apply to lenders who are highly likely to reject the loan application. Every time a borrower is turned down, regardless of the reason, the rejection will show on their credit rating - which further damages the chance of getting a loan.
Unfortunately there is very little chance of a loan application being successful if the applicant has any history of poor credit. This is a real problem for borrowers who have been wrongly identified as having bad credit. These days it is very important for everyone to keep a regular check on their credit reports.
Appeal against loan application rejection
If a loan applicant with a sound case, and supporting documents about their financial profile, makes an appeal against rejection, they have a good chance of winning. The fast pace of modern life means that many people are now job and address hoppers (this is particularly the case in the media industries) and have fallen off the electoral roll - but have excellent financial histories. Lenders must tell an applicant the principal reason why they have been declined - but only if the applicant asks.
Information on credit scoring is available from the Finance and Leasing Association, Imperial House, 15-19 Kingsway, London WC2B 6UN. Tel 020 7836 6511.
Bad credit mortgage products
There are a panel of lenders and intermediaries who specialise in providing remortgages and mortgages to borrowers with poor credit ratings. Bad credit mortgage products are offered by sub prime lenders. Prospective borrowers with a bad credit rating include people with CCJs, previous credit defaults or arrears, IVAs, no credit history, or are discharged bankrupts.
The range of adverse credit mortgage products and interest rates on offer will depend on the borrower’s financial history. Lenders in this market may ignore a limited number of arrears and CCJs settled within a given time interval (such as 1 or 2 years) preceding the current application. A minority will ignore CCJs and arrears altogether, whether settled or not, but interest rates charged can be very high.
These products offer troubled borrowers a good chance to improve their credit ratings, with the prospect of an eventual return to the credit mainstream.