When applying for a mortgage or loan or to spread the cost of car insurance or gym membership over the year the application will have to meet the lender's criteria based upon the information held by the credit referencing agencies (CRA) such as Experian and Equifax.
The problem for the borrower is that they will probably not know the criteria that the lender is applying nor will they necessarily know what data the CRA holds unless they have asked for a report.
This means the potential borrower is going in blind and could easily be turned down for that loan or credit card for reasons they are totally unaware of.
But here's the kicker, after being turned down they are usually not given any reason or advice on how to deal with it other than 'check your credit report'.
If one has a bad credit history of defaults and late payments etc then the system has worked.
However, the rejection may have more to do with the lender's ability to make money out of you than your actual credit risk, which means giving you that credit facility may actually pose a 'profit risk' to the lender. For example, those that repay their credit card balance every month and take no added extras don't make the company much money, in fact it may well cost them if the credit card is all you have with them.
Alternatively the rejection may have something to do with an error on the credit report that may have been there for years unknown to the consumer.
A Which? study found that 48% of those turned down for credit were dissatisfied about any subsequent advice and information. Which? executive director, Richard Lloyd, said "Credit card providers are letting people down by failing to give them constructive advice after a rejection. We want lenders to give a useful reason for a refusal and practical tips so borrowers can take steps to improve their chances of being accepted in the future."
But lenders will of course want to keep their cards close to their chests to ensure that people are unable to 'game the system' with any knowledge they glean.
The two main problems here are that:
1. some credit providers appear to be using the CRAs to filter out unprofitable consumers. This says to me that the products they are touting rely on the customer incurring such things as late payment fees or that they are targeting those who are more likely to take those expensive little add-ons. If that is the case then it is a job for the regulator to sort out.
2. Some files held by CRAs hold incorrect data. The only way this will be properly addressed is if the CRAs were forced by law to send an annual statement to every one they hold data on. At the moment to get this information the consumer has to apply for a statutory report or pay a monthly fee. But as there are number of CRAs and not all lenders use all of them then this could get expensive.
As ever when dealing with lenders the ordinary consumer is on the back foot. But as Which says: "One of the best ways to make sure your application has the best chance of being accepted is to check that the card you're applying for is right for you. A handful of comparison sites and lenders offer a quotation, allowing lenders to generate a quote based on a borrower's circumstances and show the likelihood of them being accepted. This also has the benefit of allowing you to shop around for credit without it showing on your credit file."