Being rich doesn't guarantee credit approval

By Benjamin Salisbury

The phrase "mo' money, mo' problems" was made popular a few decades ago when it became the title of a popular rap song, and since then, it's been used tongue-in-cheek. However, sometimes, more money really can equal more problems if you aren't spending it wisely.

Lending company Market Financial Solutions (MFS) found in a January 2016 study that up to 1 million higher rate taxpayers could be turned down for overdrafts, credit cards and loans because of a poor credit history. The study found a further 4 million could be rejected for credit, even though they had assets worth more than the amount they wanted to borrow. The reason: bad credit scores.wealth-and-debt

"Having money tied up in property, investments or a yacht in Marbella does and should not guarantee you a high credit score," James Jones, head of consumer affairs at Experian, said in an emailed reply to questions. "You can be asset-rich but lousy at managing money. Your credit score is focused on your history of managing credit, which is evidenced by your personal credit report."

What makes up a credit score?
Your credit score is based on your borrowing history and ability to manage credit from a number of accounts, including mortgages, utility bills, credit cards and mobile phone contracts.

Credit scores include information about any missed or late payments, and lenders use it to assess whether to lend money to you and at what rate.

Your credit report doesn't include information on savings, bank account balances or investments to balance out your management of previous credit - or lack of credit history - to improve your credit score.

"The correlation between current assets and credit risk isn't strong," Jones said. "There is also no easy mechanism for credit reference agencies to source reliable data on assets."

How can lower-income individuals have better credit?
People with low incomes could have great credit scores because they pay their bills on time, keep well within their credit limits and don't have too many different credit products.

An individual with a high income, on the other hand, can access higher amounts of credit, which can lead to higher levels of debt. Individuals with higher incomes also can afford to take more risks, which can lead to higher debt levels.

People on lower incomes often have budgeting ingrained into their everyday existence because they must be prudent to ensure there is food on the table and the bills are paid. Some wealthier individuals cannot manage money simply because they don't have to. They don't look at costs before buying. Without these budgeting and cash management skills, one of two things may happen.

First, a wealthier person may simply carry a tonne of debt because they know they have the means to repay it. Their credit utilisation ratio - how much they owe compared to how much credit they have - may be high, making them look like a higher risk to lenders.

Or, if things go south and money gets tight, they find they cannot budget and they begin to live beyond their means, and quickly rack up debt.

Data from the MFS report appear to support this. The report says in the last five years, 818,000 of the top 12% of UK earners have been turned down for either a main, second or buy-to-let mortgage because they have a poor credit rating.

"Britain's high net-worth profile is vastly different to that of 40 years ago," Paresh Raja, CEO of Market Financial Solutions, said in an emailed response to questions. "The demographics forming the nation's ‘asset rich' category are not only older, but far more diverse in their heritage, not to mention their route to wealth, and the UK's credit scoring system has not evolved to reflect this shift."

How can you improve your credit score?
The only way to improve your credit score is by managing your credit agreements well.

"A large number of organisations now contribute to your credit report, including your bank, mobile phone provider, credit card provider and even local water company," said Jones. "Manage these agreements well by making repayments on time and staying within agreed credit limits."

You should have a mix of credit products, but don't keep high balances on any of them. And spread out any new credit applications, Jones said. "Making lots of applications together can suggest desperation."

You should also be sure to keep your oldest accounts open and active, as they show the best picture of your repayment history.

"If you repay your mortgage or any other account and have no other open credit agreements left then your credit history can very quickly become outdated and weak," Jones said. "The key is to maintain some current positive history."

You can find more ways to improve your credit by avoiding small mistakes that can break your score, or you can seek free credit counselling. Regardless of your income, your credit score is the ultimate tool in getting new loans, so cultivate it, even if you don't feel like you have to.

See related: Are you a candidate for Debtors Anonymous?, Turned down for credit? What to do next

Published: 28 December 2016