05/01/14

Over half the UK at risk of being declined a loan

A report published in November 2012 by credit card firm Aqua suggested that over half the UK adult population is at risk from being turned down for a loan or other form of credit while a survey released in August 2013 by Amigo loans reveals that as many as a quarter of UK adults have already been turned down for a loan or other forms of  bank credit at some point in their life due to a poor credit score.

The startling findings suggest Britain is still very much in the grip of a credit crunch. Individuals who have anything other than a impeccable credit record are denied access to mainstream credit and are instead forced to take out short term loans charging exorbitant rates of interest.  These products have proliferated in recent times with millions of people turning to them as many think it is their only option. 

Between  August and September 2012 credit card firm Aqua hired quantitative research firm  Research Plus Ltd to undertake a survey using a representative sample of just over 2000 adults to analyse the level of so called uncreditworthiness in the UK.

The 'Mind the Gap' research was conducted on the basis of responses to a set of questions which mimicked a typical application process for a loan or credit card while also gaining insight into the borrowing behaviour and lifestyles of the respondents..

The alarming conclusion was 57% of the adult population in the UK, which equates to around 25 million people, would potentially be declined access to credit from a mainstream provider. Furthermore, even earning more than £50,000 was not enough to guarantee that you qualify for a loan or credit card.  The report suggests the so called credit gap is impinging upon people from all walks of life, across every part of the country and effecting all age groups.

The  'Mind the Credit Gap'  report suggests that people living in the East Midlands (65%) were more prone to suffer issues than people living in London (52%), while women (69%) rather than men (46%) are more likely to encounter problems.  There also appears to be an age bias, with young adults aged 18-24 (82%) considerably more at risk when compared with other age groups.

The findings also revealed that having a good job with a regular income does not necessarily ensure access to credit. Approximately one third (34%) of full time employees, and two-thirds (66%) of part time workers, are in danger of not meeting the criteria expected by mainstream lenders. Many would expect that a job with a well paid salary of over £50,000 would open most doors, but almost one in three people (32%) who fall into this bracket are at risk.

Popular reasons for being rejected

Those most at risk of being refused a loan include borrowers who have insufficient credit history upon which a lender can assess their risk. Often young people and immigrants come under this category and it's a bit of a vicious cycle, as you need to get access to credit first in order to be able to build up a solid and reliable track record of borrowing.  Common reasons for applications for loans being declined by mainstream lenders include not being a homeowner, for instance those who are tenants or live with parents (39%), opening more than two new loan or credit accounts in the past 6 months (30%),  making multiple applications for credit  within the previous 12 months (24%), not being listed on the electoral roll (6%) and defaulting or missing payments on previous credit agreements (5%). 

Lack of appreciation of the significance

Another quite shocking discovery from the Mind the Gap report was an apparent lack of appreciation for the significance of a credit score and how it can impact on many aspects of our everyday lives with 79% of respondents not knowing their credit score and  58% having little understanding as to what factors can influence their credit rating.

A strong credit score is an essential component of being able to access not only financial products, but everything from high speed internet to monthly mobile phone contracts. Banks, utility companies and mobile phone networks also interrogate a persons credit profile when they take the decision as to whether they want them as a customer.

An estimated 12 million already turned away

The Mind the Credit Gap report concluded that people need to place greater importance on their credit score and they need to recognise that being declined credit does not necessarily prohibit them from getting access to credit in the future.  James Corcoran of Aqua Card advised said it was essential for applicants to ensure they were registered to vote, paid all their bills on time and make sure the were no errors listed on their credit report.

James Jones from credit rating agency Experian, however points out, that although your individual credit score is extremely important,  ultimately it is the banks that decide and not the credit rating agencies.

He remarked: 'One important thing to remember is that consumers do not have a credit rating, it's something the lender calculates according to their criteria. 'They typically look at three sources of data. A person's credit report; information provided in the application; and information they have about you already. Lenders are looking for characteristics which make you similar to people they have previously lent to who have proved to be a good customer for paying back their credit. Each lender has its own criteria, but we welcome any research which emphasises people thinking about boosting their credit rating.

The Mind the Gap report investigated the potential numbers of people who could be declined credit where as a study by Amigo Loans  published in August 2013 shows that 12 million people in the UK have already been turned away for a loan, mortgage or credit card.

This is a substantial rise when compared with figures from a Datamonitor survey back in the 2010 which  estimated the proportion to be around the 7 million mark.

A worrying  finding from the Amigo survey was the number of people (72%) who felt a high interest short term loan was their only option.

James Benamor, founder and CEO of Amigo Loans said: “Banks are meant to be doing everything they can to offer credit to individuals and small businesses that need it, but the situation only seems to be getting worse rather than better. They’re letting consumers down by heavily basing their decision on an individual’s credit score – something which can be easily damaged by late credit card or missed bill payments. And this is only going to get worse as purse strings continued to be tightened and many Brits face a constant struggle to keep on top of their outgoings in the current economic climate.