When applying for finance, whether for a new car or white goods, lenders will check your credit history to assess if you’re a good candidate.
They will look at your income, the amount of credit you’ve already used, how you manage borrowing and repayments, and more. Depending on what your credit history unearths, they will decide whether to accept your application or not. And if you’ve been refused, this can be extremely frustrating—especially if you don’t know why this has happened.
For instance, there could be many reasons applications are rejected, as noted by authorised car finance provider CarFinance+, including being rejected in the past, being unemployed (or even self-employed), or trying to borrow more credit than you can sensibly afford. You could also be rejected because of a minor mistake on your application, like the wrong address. However, just because you’ve been refused by one lender doesn’t mean it’s all over. Luckily, there are many other ways of borrowing money.
Build a positive credit score
It may seem like a good idea to keep applying for more loans after being refused, but this can negatively impact your credit rating. Every application you make will appear on your file for potential lenders to see. If they can see you’ve made several applications in a short period of time, it could seem as if you’re desperate for credit, which suggests you already have debt issues. Although your rating may only drop a few points after one failed application, these points will tally up if you keep applying, causing a dramatic decrease. The lower your score, the less likely you’ll be accepted for a loan. So to prevent your score from dropping, keep in mind that most credit card issuers advise waiting at least six months before applying again.
Assess your credit history
As the lender can’t tell you exactly why your application was declined, it’s best to check your credit history yourself to find the source of the problem. According to Experian, one of the three main credit-reporting agencies in the UK, a good credit score lies between 881 and 960, while a fair score sits between 721 and 880. However, other agencies operate on different scales. For instance, Equifax states a score between 670 and 739 to be good, so bear in mind that one score may look different from another.
You can check your credit report online or request a physical copy through the three credit-reporting agencies. This file will tell you your personal information, accounts, public records, and recent inquiries, however, won’t pinpoint exactly what your problem is. You’ll have to look through your history yourself to identify why you were refused, whether it was because of pre-existing debts, missed payments, or because you have no credit history at all. Any black marks on your report, such as bankruptcies or a County Court Judgement (CCJ), will drastically impact your credit score and can make it impossible to secure a loan. If you do have any of these defaults, seek advice from a financial advisor to help put a payment plan into action.
Find alternative borrowing options
Credit unions
You could become a member of a credit union—a non-profit organisation set up to help people in the local community with their finances. Members pool their savings together to lend to one another and fund the running of the organisation. This kind of borrowing is advantageous because there are no hidden charges or penalties if you repay the loan early and the interest rate is low. Most unions will charge a rate of 1% a month, and the UK has a 3% cap on the interest they can charge monthly. You can pay back your loan in several ways, like making payments face-to-face, by direct debit, or transferring directly from your wages. To join a credit union, you must initially have some savings and share a common bond with other members, such as having the same employer or profession or live in the same area.
Community Development Finance Institutions
Community Development Finance Institutions (CDFI) are small, independent organisations that offer loans to businesses and individuals who have been turned down by their bank or credit card company. These aim to help working-class people become more financially self-sufficient and to avoid taking out payday loans, which charge higher fees than the average credit card. If you struggle managing your finances, CDFIs also offer financial advice. Websites like Finding Finance can help you source your nearest organisation.
Authorised overdrafts
An overdraft is a way of borrowing money from your bank when your account is empty. Your bank may allow you an authorised overdraft with an agreed limit, however, these can be expensive depending on each provider’s interest rates and fees. At the start of 2020, Lloyds, Halifax, and the Bank of Scotland announced they’d be scrapping daily arranged overdraft fees for an interest rate based on the customer’s credit history, with most set to pay 39.9%. An arranged overdraft is still a loan and you may be charged for borrowing, but it’s still cheaper than other credit alternatives. You should avoid slipping into an unauthorised overdraft, which is when you spend more than what’s in your bank account without your bank agreeing to it in advance. These come with extra fees, like daily penalties of £6 a day or up to £35 a month, potentially leading to further financial problems.
Credit cards for bad credit
If you’ve been refused a credit card from your bank, some credit card companies—such as Vanquis and Capital One—can still provide you with a card, but at a much higher rate. For instance, Capital One has interest rates of 34.9%, compared to 19% for the average credit card. While they do have high-interest rates, these kinds of credit cards can help you build up your credit rating, as long as you remember to repay on time. They can be used to make small purchases that you can immediately afford to repay in order to help your credit score grow, and should only be used when absolutely necessary as you risk paying back a lot more than you borrowed. As with any credit card, you should be very cautious in using your card and try to pay it off in full every month to help build your credit score.