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.

Here are some tips to help stop the credit crunch becoming a credit crisis:

1. Check your credit report regularly: Make sure that every entry is correct. In the current economic climate, a single clerical error could result in rejection of a credit application. You can access your credit report for free at http://www.experian.co.uk/creditreport/

2. Manage money carefully: Pay bills and make repayments on cards, loans and your mortgage on time – otherwise your credit rating will be damaged. Keeping a record of what you are spending is useful. It helps identify unnecessary expenditure.

3. Trim your bills: Try price comparison sites to find the best deals on loans, mortgages and credit cards, as well as electricity, gas, and telephones. The Financial Services Authority’s “financial health check” http://www.moneymadeclear.fsa.gov.uk offers useful advice on budgeting.

4. Consolidate debts charging high interest: Credit card debts, for example, can be rolled into a single, cheaper package, like a bank loan. There are plenty of financial comparison sites with calculators that can help you to identify the best option.

5. Do not attempt to borrow yourself out of trouble: The debts will soon stack up. Every application will be recorded on your credit report. Too many applications and lenders may think that you are in financial difficulty – then you are more likely to be rejected for credit you really need in the future.

6. Look for ways to supplement your income: For example, you could get a part-time job in the evenings or at weekends, sell off unwanted household items, or even take in a lodger.

7. If financial trouble is looming: Talk to your lenders, particularly the mortgage lender. They will often help you to work out a revised schedule of repayments you can afford, or even arrange a temporary repayment holiday.

8. Make sure your partner has no hidden financial problems: If you have a joint account, or have applied for credit with a partner, you will be linked. The name of your financial partner will appear on your credit report. You may not know if he, or she has had any problems, but a lender will check. So get your partner to check their credit report, too. If you are no longer together, make sure you get the link broken – called a disassociation – so that any problems your former partner might be having do not cause you problems.

9. Register to vote: Lenders use the electoral roll to help verify identity. They also check for stable residency; that you have lived at the same address for a number of years. If you fail to register to vote, lenders cannot easily verify that you are who you say you are, and may ask for additional identification, or even turn down your application outright.

10. Get free advice: Free advice is available on anything from assessing your financial situation to your legal position. Try the Consumer Credit Counseling Service at http://www.cccs.co.uk, National Debt Line at http://www.nationaldebtline.co.uk, and Citizens Advice at http://www.citizensadvice.org.uk