Half of consumers risk being swallowed by credit gap

By Marianne Curphey

More than half of all UK adults are at risk of being denied credit by mainstream lenders, according to a recent report. Here's why you might fall into the credit gap -- and how you can work your way out.

Who's falling into the credit gap?
Card issuer Aqua surveyed more than 2,000 people for a report in November 2012 and found that 57% were at risk of being turned down for credit.

The report, "Mind the Credit Gap," found that the most affected were those who didn't have a credit history. Other commonalities shared by those turned down for credit included missing payments, not being on the electoral register, not being a homeowner, having too many cards and making too many applications for credit.

The research also showed that those often considered financially healthy were also at risk. Roughly one-third (34%) of people in full-time jobs, and 32% of those who earn more than £50,000 annually could also struggle to get credit. credit-gap

It all comes down to your credit score
Why is the credit gap swallowing such a wide swath of the population? Credit issuers can afford to be choosy. To them, it all boils down to your your credit score.

"We know that lenders are looking at each application very closely and that in order to get the advertised headline rate people need to have a good credit score," says James Jones, spokesman for Experian.

Even if your credit application is accepted, you might not get the terms you hoped for if your score is less than stellar. Lenders, Jones says, apply "personal pricing," which means the interest rate you are offered might not be the headline rate advertised, but one based on your personal credit score.

The credit gap doesn't just ruin your chances at getting a credit card, the Aqua report found. Those wishing to take out contracts with utility providers, mobile phone companies and broadband services, or even those trying to get the best rates and deals from these services, will often need to pass a credit check. 

However, Aqua's findings show that 79% of those surveyed had no idea what their credit scores were, and half didn't know how to improve them. The report also found that, of those who had been refused credit, 85% didn't bother to find out why.

"If you have a damaged credit record and don't enquire why, you could end up paying more or at worst, having limited access to credit," says Sarah Willingham, founder of Letssavesomemoney.com.

The irony, says James Corcoran, CEO of SAV Credit, the company behind Aqua, is that the people who need their money to go further are the ones who end up paying more because they can't get good contract terms.

"They pay for utilities and mobile phones on a pay-and-go basis for instance, which can cost up to 27% more than paying via direct debit," Corcoran says.

Minding the credit gap
So how do you stay out of the credit gap? You'll have to play by lenders' rules. Corcoran provides the following steps for keeping your credit score up:

  • Make sure you're on the electoral role. It's how lenders verify your identity.
  • Pay all credit bills on time. Paying even a couple of days late can ding your credit score and burden you with fees.
  • Apply only for credit products when you really need them -- applying for more than four forms of credit in a year (and more than two in a six-month period) can lower your credit score.
  • Do not apply for more than one product at a time, as each application can have a negative impact on a credit record.
  • Close old credit card accounts and cancel old direct debits.

Another way to polish your score is by correcting errors in your credit reports, Experian's Jones says. It's easy to contact credit agencies, including Experian, to correct any mistakes you find on your credit file. You can also add explanations for things that might scare away lenders.

"If you have a missed payment and there was a good reason for that, you can add a note to your file so that a lender will see the explanation when they are considering your credit application," he says.

Lenders, Jones says, also look at your "utilisation" of credit -- how much of your available credit you are using.

"If, for example, you have five cards with a total limit of £20,000, and you owe £19,500, then that is a very high utilisation rate and it does not tell a good story," he says.

For the best credit scores, Jones recommends keeping the balance on a card to 30%

or less of the actual full amount you were able to borrow.

Still stuck in the gap? What to do next
People who are denied credit from mainstream lenders might try getting credit cards with

higher interest rates, says Andrew Hagger, director of MoneyComms, the independent money

advice service. Such cards aren't ideal, but they're a better route than turning to payday loans, which may be easier to get, but which can  have APRs of more than 4,000%. The higher interest rates do not have to impact you if you pay off your balance in full at the end of each billing cycle.

Hagger says there are three main credit card providers to consider: Vanquis, which has a card with an APR of 39.9%; Luma (partnered with Capital One), which has a card offering a 35.9% APR; and Aqua, which offers three cards designed for those with poor credit: the Classic card (32.9% APR), Reward card (34.9%) and Advance card (34.9%).

With such cards, you'll likely be stuck with a low credit limit in addition to the high interest rate.

Yet, if you are responsible with the card, you'll be able to pay your dues, climb out of the credit gap and move on to a better card.

"Although the amounts available to borrow are quite small - usually £250 to a maximum of £1,500, this does help to ensure people don't take on more debt than they can manage," Hagger says. "The interest rates are high, but not as high as a payday loan."

See related: Do you need to go into debt to get out of debt?, 4 traits that make you a good rewards card candidate


Published: 8 January 2013