Have you been turned down for a loan or a new credit card recently? Banks and lenders can be fickle, so it’s hardly unusual – but that doesn’t make it any less frustrating.
When lenders run a credit check, there are lots of different factors that they take into account, some of which can be quite surprising. Remember, banks don’t see a numerical credit ‘score’, but rather a summary of information about your spending history. Sometimes the conclusions they draw may not be what you expect.
Your credit balance is too low
Not borrowing money tends to be a mark of financial responsibility, so it may seem unlikely that banks would want you to spend more on your credit card. However, having a balance that’s too low is often seen as unusual – and lenders don’t like it, because it doesn’t give them any sense of how well you cope with repayments.
Of course, it’s always better to spend too little than too much. But if you really want to improve your score, the best option is to use around 5-10% of your overall credit limit and pay it back in full each month.
You’ve recently finished paying off a loan
Paying off your debts is an important step towards financial independence. Once again, though, it can have a negative impact in the short term. Once you finish paying off a loan, you end that financial association. Lenders like to see that customers have been with the same providers for a long time, and they also prefer customers who can demonstrate their ability to make reliable, regular payments. The same is true if you decide to close a credit card.
Frequently switching accounts
We mentioned above that lenders will judge you on the length of financial association, and that’s one good reason to think twice before changing your bank account or energy supplier. It’s really easy to change to a new supplier these days, and comparison sites will help you to find a better deal. This is great, because it brings your monthly bills down… and the savings can really add up over the course of the year.
We’re definitely in favour of people switching energy or broadband suppliers. However, if you know that you’re going to be applying for a new loan or credit card soon then it’s best to wait until after the application.
The same is true for bank accounts. If you want to switch to a new account in order to take advantage of a switching bonus such as free cash, then we would recommend waiting until after any important credit applications. Remember, opening a new bank account will also leave a search on your credit report, which can have a short-term negative impact.
You’ve recently increased your overdraft limit
Applying for lots of credit in a short space of time raises alarm bells for the banks, as they’re concerned about your ability to repay. This applies even when it comes to increasing the limit on an existing overdraft, something which many people do without much thought, just because the bank lets them know that it’s available. Make sure you only increase your limit if and when you need to.
The key thing to remember is that none of these factors will have a long-term impact on your report. So if your credit rating has dropped slightly due to one of the reasons listed above, it’s nothing to worry about. You may just need to wait a couple of months before applying for any more credit.