The secret way banks monitor you
High street banks are watching your behaviour like a hawk, supposedly for your own good. John Fitzsimons finds out what they are REALLY looking out for.
If you're confused about how banks decide who they will or will not give credit to, you're not the only one. Here are some of the typical questions lovemoney.com readers have asked about this topic on our excellent Q and A function:
Will it impact my application if I already have lots of credit cards? What about if I don't have any? How much damage does a missed payment cause? Or using my overdraft?
And all this confusion can cause a lot of fear and concern.
After all, when it comes to credit, the banks are following our every move.
Now, I want to throw some light onto exactly what it is they're up to - and why.
A wallet full of plastic
I have three credit cards. Is that a good or a bad number? What will banks think of it, should I want to remortgage soon?
As with everything in life, the number of credit cards you have is a matter of balance. If you don't have any, and have no history of paying off debt, then you don't stand a great chance of getting credit. Your best bet is to go along to your bank and discuss it with them.
However, for most of us, it's the opposite scenario - too many cards - that is the problem. If you do have a load of credit cards, it WILL count against you. A bank will not want to run the risk of overloading you with debt, as you may not be able to pay them back.
Just as big a problem is having a lot of unused cards. If a bank looks at your credit position, and sees three cards with plenty of credit left on them, they are unlikely to want to lend you more. Even though you are not using that credit right now, it is still available to you, and combined with a further loan there is potential for over-stretching.
So if you have paid off a credit card and have no intention of using it again, don't just leave it sitting in your wallet! Get it cancelled, and do it now!
Get registered on the electoral roll
A query we get quite regularly at lovemoney.com regards the impact that failing to register on the electoral roll can have on your credit report. This one is no myth - if you are not on the roll, you might hit problems getting credit.
This is because lenders use the electoral roll as a primary method of checking your name and address details are correct, so it is very important to get on there.
In addition, if your history shows a lot of changes of address in a relatively short period of time - say, three homes in three years - then lenders might be a little wary, as they like to see some stability from prospective borrowers.
But if you register on the electoral roll with each change, that damage is limited. Registering to vote is free and you can do most of it online. If you keep your named off the 'edited register', companies cannot buy your details.
The damage of a missed payment
I cannot emphasise enough how badly this hits your credit rating.
Even a single missed payment is enough to suggest financial 'mismanagement' and raises the possibility of further missed payments down the line.
Of course, sometimes there are extenuating circumstances behind a missed payment. If there is a justifiable reason for a missed payment - a family issue, or sudden unemployment perhaps - then you can add an explanation note to your credit report.
This will show up in future checks, so the next time you apply for credit, the provider will be able to take your explanation into consideration.
Multiple failed applications
When I was first turned down for a credit card, I made a daft mistake. I just accepted it. There was no explanation for why I had been rejected, and I opted not to pursue it.
Do not make the same mistake!
If you are turned down for credit, ALWAYS make sure you get an explanation for why. Banks are obliged to give you the principle reason for your rejection.
This is important, as if you simply apply elsewhere and get rejected again, this will stand out as a warning beacon in any future applications. If this then leads to a chain of rejections, then your credit rating begins to look a bit of a mess.
It may be a simple mistake that has led to being declined, but if you do not ask, you won't know what it is, and cannot fix it.
Correct any mistakes
You may feel that your credit report does not truly represent your position, in which case you might like to consider adding a Notice of Correction. This is a 200 word statement which you can add to your file to explain any entries in your credit report. Lenders are obliged to give the notice due attention, so it can be very handy.
There is a really good explanation of when you might like to use a Notice of Correction on the Equifax website, so if you are worried that your credit report does not give an accurate picture of your financial circumstances, be sure to have a read.
> Worried there are mistakes on your file? You can get a free credit report from Experian if you sign up for a 30-day trial.
Using an overdraft
This is another area which is surrounded by great confusion. Banks are obviously watching the way we manage our money - does it count against us if we regularly use our overdraft?
Well, fear not, because no, it doesn't! Or rather, it does not matter, so long as you do not exceed your agreed overdraft limit. If you have an agreed overdraft limit of £250, and regularly go £200 overdrawn, don't worry because this does not show up at all on your record, and will not count against you.
It is only if you exceed your overdraft limit that you may face problems, as again, this is seen as a sign of poor financial management. So if you regularly go over your limit - even by £1 - you're in trouble. If you really can't afford to stay within your current limit, don't bury your head in the sand. Ask your bank if you can agree a new limit. And then make sure you stick to this.
The three golden rules
When considering an application from a customer, banks will look at your overall financial behaviour before making a decision. So just follow the three golden rules, and you should be fine:
- 1. Always pay all of your bills, on time
- 2. Ensure you are registered on the electoral roll
- 3. Close accounts with existing credit you no longer plan to use
If you abide by these three rules, then you will have absolutely nothing to worry about.
Remember, the banks are watching you.... Make sure they never have a reason to turn your application down.