Whenever you apply for credit, lenders make numerous checks behind the scenes. Find out why you may’ve been approved or declined and improve your chances.
Although it’s easy to take rejection personally, sometimes you just won’t fit a particular lender’s criteria, no matter how spotless your credit record.
"Check any terms and conditions before you apply," said Gocompare.com's Matt Sanders.
"Lenders have to state any minimum requirements and exclusions before the application process, such as minimum income, age, residential status or being an existing customer."
Understanding the process and knowing the checks lenders make behind the scenes will help you to improve your chances of being accepted for credit products in future.
It may also persuade you to use a so-called smart search tool before applying for a financial product.
Such a tool will perform a soft search of your credit record that won't be visible to lenders, allowing you to get a good idea of the products you're likely to qualify for without risking any damage to your credit history.
When you fill in a credit application, whether that’s online or a paper form, lenders will go through four main stages of checking your identity and creditworthiness.
To prevent fraud, it’s vital that lenders check that you are who you say you are and that you meet the minimum requirements for the application, such as being a UK resident or having a minimum income or employment term.
Often, a lender will check your identity electronically from the details you give on your application form matched against credit files which hold information from the electoral register.
This is why getting yourself put on the electoral register at your current address can be such an important thing.†
If a lender can’t verify your identity this way, perhaps because you’ve recently moved house, they’ll ask for extra documents, such as a certified copy of your passport, or recent utilities bills.
The lender creates a record of information that allows them to carry out the next two checks.
The lender checks the information you’ve supplied in your application against anything they already know about you, such as any previous dealings you've had with them or their affiliates.
Failing the lender's criteria for any of the four steps will usually result in either a referral or a decline
This step is usually last as you should pass the previous points before it's carried out.
It involves the lender accessing the information in a credit file held on you, the credit file being a record of your financial behaviour which is compiled by one of the three credit reference bureaus - Equifax, Experian and Callcredit - and used by various third-party agencies.
You'll need to give your explicit consent for the lender to look at such a file before they can take this step.
Failing the lender's criteria for any of the four steps will usually result in either a referral or a decline.
If the outcome is a referral, the lender will ask you for more information, for instance to verify your identification or income.
If your application is declined, lenders are required to give you a reason why. Most often it’s because you didn’t meet their criteria when the credit check was carried out.
It’s important not to respond to a decline by immediately making lots more applications - each one will show up on credit files and too many in a short space of time may adversely affect your ability to get credit.
Instead, it may be more productive to check a credit report yourself and look for any problems that might be causing rejections.
It’s important for customers to understand that lenders don’t fit their lending profile around the numeric ‘credit score’ attached to a credit file - this is more of an indication to customers on how strong their profile is.
It’s possible for a customer with what may appear to be a very high score to be declined if they don’t fit the profile the lender’s looking for.
It’s also important to understand that not all credit checks are equal - some lenders will look for missed payments in six months, some will look for two years, some may not even care about past problems in this area.
In general, the better the product, the more specific the criteria will be.
Other reasons for a credit decline might be inaccurate data - in this case, customers should contact the bureaus and ask for the data to be updated.
Every customer should have a good idea of what credit records held on them hold.
An understanding of your credit file might be the difference between a good and bad interest rates on a loan, or even an accept or decline.
You should always consider your credit profile before making any application, as even failed applications will show on your file and can exacerbate credit issues.
Proactive checking also allows you to correct any information and track changes.
Tracked changes can also be good fraud indicators, which is why some credit report agencies offer fraud alerts with their products.