Understanding credit card approvals

A credit card can be an attractive way to borrow money in the short term, especially as many lenders now offer features such as cash-back schemes and Nectar points. In recent times, however, even those with no history of bad credit have found it hard to obtain credit cards as a result of banks becoming more cautious about lending and tightening their criteria.

Poor availability of credit

The difficulty in obtaining credit cards was highlighted by recent figures from the UK Cards Association, which revealed that banks and other lenders only accepted around half of all credit card applications in 2008 and 2009. Some 48% of applicants were turned down in 2009, compared with 42% in 2008 and just one-third prior to that. According to the organisation, the trend has been fuelled by the £110bn losses sustained by lenders in 2007 as a result of consumers defaulting on loans. This has led personal finance providers to take steps to prevent further losses.

Credit scores and interest rates

When a person applies for a credit card, the lender runs checks to see whether the applicant is likely to be in a position to repay the money they borrow. This involves asking them a number of questions about their income, expenses, assets and existing debts. The lender then gives the potential customer points for each of their answers in order to form their credit score, and anyone with a low number of points is likely to be rejected.

Alternatively, applicants sometimes find that while they are not rejected outright, the deal they are offered is offset by a higher interest rate than the one advertised. Bank of England statistics, published in January, show that the average credit card APR is currently 16.4%. If a cardholder always pays off their balance in full each month, the APR should not matter to them as they will not be charged any interest on their purchases. However, customers who intend to pay off their balance in small amounts should take care when comparing credit cards to ensure they do not end up with a prohibitively high APR.

What to do next?

Unsuccessful applicants are usually given a brusque decision with little explanation, but that need not necessarily be the end of the story. Consumers may be able to argue their case if they have information that could sway the lender's decision.

In particular, they should obtain a copy of their 'credit history', a file of information held by credit reference agencies that contains details on whether a person is on the electoral register, whether they have had any county court judgements or bankruptcy orders, or whether they have missed any loan repayments or had their house repossessed. It is vital that consumers keep a close eye on their credit file, as there may be incorrect information that could sway a lender's decision and lead to a rejected application.

If this is the case, the individual should seek advice from the credit reference agency on how to have the erroneous information removed and consider comparing credit cards once more in a few months' time