What is credit awareness?

What’s the biggest thing you will ever buy in your life that you’ll never know you bought let alone how much you paid for? That’s right – credit.

 

OK, if you’re super wealthy then that’s less likely to be true – you may have so much money you don’t need credit. But for everyone else, the cost of credit can be significant. It’s not unusual for the amount you pay for credit over the lifetime of a mortgage to exceed the original value of the house. What’s more, the total cost of credit in your lifetime will remain a mystery to you.

It’s scary, but not surprising. Credit is rarely viewed as a product in its own right, but simply the mechanism to help us buy the product we really want to get – be it a house, car or item we want from our favourite retailer. And therein lies the problem.

 

Our lack of understanding of how credit works and what we need to do to ensure we maximize our credit scores so we can get the most competitively priced deals for our future credit needs – means we inevitably end up paying more than we need to in the long run.

 

We shouldn’t be too hard on ourselves. Lenders haven’t always made things consumer friendly in the maze of terminology that litters the world of lenders – from peer to peer finance, high-cost, short-term credit or the difference between personal contract purchase and personal contract hire when buying a car. And how about the mysteriously named logbook loans for those that want a loan that will be secured against their car?

 

To navigate the maze, we have to invest time just to understand the landscape we’re dealing with. Add to the mix that the very measure of the cost of credit – APR – that annual percentage rate, not April as some people in our early polls thought – is only understood by a very rarefied world of the smartest of people in the world of credit risk and you can see why many of us just get stumped.

 

Albert Einstein is supposed to have said that compound interest – the basis of APR – was the eighth wonder of the world. Or the greatest mathematical formula of all. Or something to that effect.

You’ve been refused credit

  • Did the lender give you the reason?

No reason given

  • Go back and ask the lender why. Banks and lenders should give you the main reason or reasons for refusing credit, if you ask.

    If necessary, speak to someone more senior or someone in the lender’s underwriting department. Be polite but firm and put your request in writing if necessary. If they refuse to help you, make a formal complaint.

They said it was because of:

Negative credit history information

  • Get a copy of your credit report from the credit reference agency/ies the lender used.

  • Check for errors, including debts you disagree with or previous debts that are correct but not showing as paid off. If there are errors, ask the credit reference agency to raise disputes for you with the relevant organisations until they are fixed.

  • Negative information in your name usually stays on your credit report for six years and can’t be removed sooner if it is accurate. However, if there were extenuating circumstances, such as losing your job or going into hospital, you can add a note to your credit report to explain this. Read about notices of correction on the Experian website.

    Negative financial information about other people you have linked up with in the past won’t be included in the report you see but you will see their name in a section about your ‘financial associations’. By ‘linked up’ we mean applied for credit together - simply being in a relationship or living with someone doesn’t count. If you are no longer linked to a person shown on your report then contact all three credit reference agencies and ask for a financial ‘disassociation’.

  • If/once your credit report is correct and up to date, consider using a comparison and eligibility service, such as that provided on the Experian website, to find credit offers you’re likely to be accepted for. Alternatively, you may want to go back to the lender that refused your initial application and ask them to look at it again.


An affordability issue

Struggling

  • If you are really struggling to make ends meet then you should consider seeking free, confidential, expert advice – and the sooner you do this the better.

    Check out the Money Advice Service website for sources of independent, free advice and support.

    Borrowing further money at this stage could make your situation worse.

Not struggling

  • If the lender has refused credit because of an affordability issue they are basically saying they don’t think you can afford the repayments, either now or in the future.

    If you disagree, consider going back to the lender to argue your case, offering any relevant evidence to support your case.

    Alternatively, use the opportunity to sit down and review your finances to see if you can increase your income and/or reduce your spending.

  • Tips on reviewing your regular spending
    Go through your bank and credit card statements. For things you regular spend money on, ask yourself whether you need it and, if you do, can you get it cheaper. Millions of people are overpaying for utilities and financial products in the UK. Use comparison services to see if you can switch and save.

  • Draw up a budget
    Include paying down existing debts. Make sure your budget is realistic and then stick to it. Try to allow yourself the occasional treat.

  • You may decide to switch credit products to save some money, for example by securing a cheap balance transfer credit card deal.

    Before you apply, make sure you use a comparison and eligibility service, such as on the Experian website, to help you apply for deals you’re likely to get.

A fraud or identity problem

  • If the lender thinks your application was fraudulent in some way, they may be reluctant to give you very much information about their decision. However, it’s worth trying to find out more and to argue your case if you are innocent. You can ask the lender to review their decision and offer them evidence to support your case.

    If you have been a victim of identity fraud then make sure you alert the credit reference agencies because they will be able to offer help clearing up your credit report. If you contact one of the three main agencies they will be able to alert the other two for you. If necessary, they can also help you add security features to your credit reports, which can be useful if further fraud is likely.

    If the lender could not confirm your identity, offer to provide physical proof of your name and address. This usually takes the form of original, recent bank statements or utility bills, and a copy of photo ID. They may then be able to reconsider your application. As some lenders use your credit report to help confirm your name and address, take the opportunity to review your credit report with all three main credit reference agencies. Make sure your name and address is shown correctly and you are registered on the electoral roll.

Credit score is too low

  • Start by getting your credit report from the credit reference agency (or agencies) that the lender consulted. Then check through the information carefully. Remember that the lender used this information to help calculate your credit score.

    You find contact details for each agency on the Money Advice Service website.

  • Once you’ve got and checked your report/s, are there any errors?

Yes

  • Ask the credit reference agency concerned to dispute the relevant entry/ies for you. If necessary, they will contact the provider on your behalf to check the accuracy of the information and then update your report if necessary once a reply is received.

    If you and the lender cannot agree on the facts, the agency will help you decide what to do next.

  • Check the credit reference agency’s guide score

Great guide score

  • Go back to lender and appeal. Under the Data protection Act you have the right to challenge a decision reached purely on a score, by asking for the lender to review your application manually (ie by a person).

    This also gives you the opportunity to argue your case, if applicable, by providing additional supporting information such as proof of regular bill payment (not included in your credit report).

Guide score is not great

  • Get tips on how you might improve your future score: read this article on improving your scoreby Experian

  • Find credit products more suited to your current score by using a comparison and eligibility service, such as that provided on the Experian website.

    You may wish to challenge the credit refusal and argue your case. Under the Data Protection Act you can appeal a refusal based purely on a score by asking the lender to review and reconsider your application. This would be referred to a person and you could use the opportunity to provide extra supporting information, such as proof of a regular bill payment not included in your credit report.
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