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Feature:Dealing with rejection

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23/04/2008

Kate O’Raghallaigh looks at the diminishing availability of plastic power

If the figures detailing consumers’ difficulty in getting approved for a credit card are true, then you probably shouldn’t apply for one unless you have a thick skin. According to personal finance website MoneyExpert, 3.24 million people have been rejected by credit card companies over the past six months, amounting to a total of 18,000 rejections per day.

This means that at some point over the past six months, 7% of all UK adults – and 10% of people aged between 25 and 34 years old – have dealt with a credit card rejection. Consumer credit levels have subsequently fallen as providers and banks tighten up their lending criteria, according to the British Bankers’ Association (BBA), with consumer credit increasing by £0.5bn in March, compared to £0.7bn in February.

“What we’re seeing is that, unless you have a perfect credit record, you are going to struggle,” says Michelle Slade, analyst at price comparison site MoneyFacts. “For new customers, there are still competitive deals out there, such as ones offering 0% on balance transfers, but they are just harder to get at,” she adds.

All the signs seem to show that the tide is turning, according to Sean Gardner, spokesperson for MoneyExpert. He says: “For years, borrowers have had the upper hand in the credit card game but the rules have now changed. People with debts who thought they could keep shuffling their cards to stay ahead are now running into trouble.”

A tougher market

Customers may also be caught out by this growing trend because the kinds of cards being offered haven’t really changed, says Steve Willey, head of credit cards at price comparison site Moneysupermarket. He explains: “On the face of it, the credit card market hasn’t changed that much, but behind the scenes, lenders are being very choosy about who they lend to.

“One of the big things they are looking at is your ability to actually repay the credit you are given, as many people out there at the moment are looking for credit that they may not be able to repay. For example, if you have a credit limit of £10,000 on one card and want to switch to another card, you would be assessed on your ability to repay the balance on both.”

So will the credit card market head in the same direction as the mortgage market, with fewer products available and a narrow choice of product rates? It’s unlikely, says Willey. “What I imagine will happen over the coming months is that credit card providers will make the deals they offer now even better, but only offer them to the best people. Different cards could then be offered to those who are less financially secure, much in the same way as specific mortgages are offered to sub-prime borrowers.”

Cause and effect

The consequences of being rejected by a card provider reach beyond having less credit at your disposal, however. People who are rejected for credit cards but continue to apply elsewhere are at risk of damaging their credit record. Each time you are rejected, a mark could be put on your record. Subsequent lenders will be even less likely to offer your credit if you have these marks on your report. “The current acceptance level is only 10-15%, but unfortunately, you won’t realise you have a slim chance of being accepted, until you are rejected,” says Willey.

Gardner continues: “Card applicants need to be confident that they are going to be accepted in the current lending environment, as a rejection could lead to black marks on credit reports. A credit rejection could have knock-on effects for borrowers when it comes to taking out all kinds financial products, including a mortgage.”

But what is a credit report? Your credit report outlines your credit history, which may include details of any overdrafts, credit cards and mortgage payments you have held or failed to pay, and also public records such as county court judgments (CCJs), declarations of bankruptcy or individual voluntary arrangements (IVAs). Other entries could include mobile phone or other utility bills, as well as electoral roll details.

Lenders use your credit record to assess whether you are a suitable borrowing candidate. If, for example, you have applied for a credit card but you have a history of making late payments on a personal loan, you may find it difficult to qualify for further credit. Certain things, such as not being listed on the electoral roll, can automatically result in a poor credit score. Surprisingly, if you don’t have a credit history (because you have never borrowed or owned a credit card before), this could also work against you as lenders may feel uncomfortable that they cannot predict your repayment patterns.

Think ahead

Before you make as many credit card applications as you can fit into your lunch hour, it’s a good idea to stop and think why you need the credit in the first place – if you are already in debt, you should think seriously about how to address the problem without resorting to additional credit. Secondly, it’s advisable to check your credit record, so that if you do apply for a credit card, you will have a fair of idea of the chances of success and, if you are rejected, at least you will be able to find out why and hopefully rectify the situation.

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