As far as interest rates go, borrowers are enjoying a golden summer. Mortgage lenders, buoyed by £80bn of Bank of England funding for lending cash, are competing hard for business. As a result, rates on two-year fixed mortgages have dipped below 2 per cent, making them cheaper than inflation. Meanwhile, personal loan rates have finally gone below the levels seen prior to the global financial crisis.
But although banks may be lending and competing again they are still being picky over who they open their coffers to. The latest stats show that seven million credit applications were turned down in the last year and personal loans had 1.6 million applications rejected, followed by 1.2 million credit card applications refused in a single year, according to the Debt Advisory Centre. A further nine million people didn't even bother processing their applications for fear they would be declined. Younger people seem particularly worried about their credit rating with 25 per cent of 18- to 24-year-olds surveyed saying they avoided applying for credit, compared to just 11 per cent of the over-55s.
It has never been so important to understand how the credit system works and, more importantly, how you can beat it.
Every time you open a new form of credit it leaves an electronic footprint on your record. If you apply and subsequently get turned down this also leaves a footprint which could make it even harder to be accepted in the future. The problems don't end there either, with an estimated 7.3 million people with a poor credit rating struggling to open a bank account, take out a mobile phone contract or rental agreement, buy home and car insurance, or even get a job. "Credit's not the only thing that depends on credit ratings. As our research clearly shows, the way you've handled your finances in the past can have a much bigger impact on your life than you might expect," says Ian Williams of the Debt Advisory Centre. "Everyone knows a poor credit rating can stop you getting a mortgage, for example, but what does someone do if renting isn't an option either?"
Lenders score you individually based on their own criteria for the "perfect customer". This varies from lender to lender so one rejection may simply be because you don't suit their particular customer profile. Several rejections are a concern, however, and this usually points to a poor credit score. The higher your credit score, the more likely you are to get accepted and many lenders also reserve their cheapest deals for people with high scores.
Fortunately, bad credit doesn't last forever and there are practical steps you can take to improve your rating, starting with getting copies of what credit reference agencies say about you. There are three agencies - Callcredit, Experian and Equifax - and you are entitled to look at your file from each for £2, although Experian and Equifax both offer free trials for 30 days and you can check your credit record with Callcredit free through www.noddle.co.uk.
"Given the current economic environment it's now more important than ever for consumers to take greater control of their finances. Having access to your credit report will help consumers gain a better understanding of their credit history and how to improve it," says Tom Ilube, founder of credit checking specialists Noddle.
Minor mistakes such as forgetting to cancel old credit cards and failing to register on the electoral roll will have an impact. Lines of credit still appear on your file if you don't terminate them and lenders may be concerned that you could max these out. You may also have an old address for a mobile contract that you don't use but haven't cancelled, or a financial link to an ex-partner. If you are divorced or separated, remove your ex-partner's details from any joint accounts or loans as their credit history can affect your rating.
If anything is amiss get in touch with the credit reference agency to get it amended. You also need to be vigilant for any products you haven't taken out, in case of ID fraud.
If you want to improve your credit score pay bills on time and avoid a high balance on your credit card. Space applications for credit carefully and only apply when you need it as applying for more than four forms of credit in a year can lower your score. Even with existing cards that you do use, if you don't need the full credit limit get it reduced as this may make you a better risk when you apply for another form of credit. Lenders are looking for stability so use a landline instead of a mobile number on applications. Long-term employment history, sticking with the same bank and living in one place for a long time (preferably owned rather than rented) will all help.
Check your credit report annually at least and use comparison websites such as Moneysupermarket.com and Confused.com to check whether you are likely to get a particular card without placing a "footprint" on your credit report.