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What To Do If You Can't Get Credit

Having helped to fuel the biggest borrowing binge in history, British banks are becoming increasingly nervous about lending to individuals.

Higher household bills (especially energy prices), plus record house prices, mortgage and other debts have all combined to make banks and other lenders more nervous about extending credit to overstretched consumers. Since the beginning of 2006, many lenders have tightened their lending criteria, particularly for credit cards and unsecured personal loans. This is partly in response to rapidly rising bad debts and a huge increase in the number of insolvencies and bankruptcies.

Hence, banks have responded by scrutinising applicants' finances more closely, sharing more data on personal debts, and checking people's credit-card use and ability to repay via credit reference agencies. In addition, credit-card limits are being reduced for existing customers, notably at Barclaycard and Egg.

Naturally, stricter lending guidelines mean that more and more people are being turned away for credit. Indeed, the Finance and Leasing Association, a trade association for lenders, recently reported that some lenders are turning down up to half of all applicants for credit.

So, what can you do if you find yourself being routinely turned down for credit, or not being given the attractive headline interest rate being advertised? Here are ten ways to improve your creditworthiness:

1. Avoid rate tarting too often

Rate tarts (also known as 'card tarts') are a lender's worst nightmare. These skilled card players surf their debts from one 0% credit card to another, paying no interest as they go. By making use of 0% balance transfers and paying only minimum monthly repayments, rate tarts actually end up costing lenders money, sometimes hundreds of pounds at a time.

For example, over the last six years, I've borrowed hundreds of thousands of pounds without paying a penny in interest, which means that I've cost a string of lenders thousands. Naturally, card issuers don't like this game, so it's become increasingly hard to be a rate tart, plus these firms have introduced transfer fees to recoup some of their losses.

Hence, I often get turned down for credit these days. Thus, I only play the tarting game a couple of times a year, in order to maximise my chances of success.

2. Become better at budgeting

As I mentioned above, more and more lenders are checking applicants' spending patterns and existing card usage before deciding whether to lend to them. Of course, knocking your household finances into shape will put you in a much better position when you need to borrow. So, learn how to budget, pay your bills on time (ideally by standing order or direct debit) and remember that you're given a credit limit, not a target!

3. Beginners' cards

If you've never borrowed money from a bank or other lender, or you've had problems with managing credit in the past, you may find it almost impossible to borrow from mainstream lenders. In this situation, you could establish or rebuild your credit history with a credit card aimed at beginners. Cards in this category include the Barclaycard Initial (27.9% APR), Vanquis Blue (29.9% typical APR), Capital One Classic (34.9% APR) and Vanquis Abacus (39.9% typical APR). As you can see, these cards come with high interest rates, plus low credit limits, so be sure to spend on them only what you can afford and pay off your bill in full by monthly direct debit or standing order. Otherwise, they may become too hot to handle!

4. Boost your income

How much you can borrow is strongly related to how much you earn; generally speaking, the higher your income, the easier it is to borrow and the more debt you can run up. So, raising your income can boost your chances of being accepted for credit. You can learn how to get a bumper pay rise, plus you can find out which benefits you can claim at free, independent website EntitledTo.

5. Check your credit record

If you're having difficulty getting credit today, it may be because you've blotted your copybook in the past, perhaps by missing credit repayments or exceeding your credit limit. On the other hand, it may be because you apply for credit too often or even that a fraudster has acquired your personal financial information and is applying for credit in your name.

The only way to find out is to check your credit files held by the three leading credit reference agencies: Callcredit, Experian and Equifax. Each written report will cost £2 via the post (or £8.95 to £12.50 for an instant online report), but a free thirty-day trial of CreditExpert from Experian comes with a free credit report.

6. Close dormant accounts

In the bad old days of the late Nineties, at the peak of my borrowing binge, I owed almost £50,000 on three personal loans and thirteen credit cards. Getting rid of this burden was an uphill struggle, but it taught me valuable lessons about budgeting, spending and borrowing. Despite my experiences, I still have fourteen credit agreements listed on my credit file, most of which are dormant or have a zero balance. Closing these dormant accounts will making getting credit easier in future, as it won't look as though I have too much credit available to me.

7. Credit unions

You don't need banks, building societies or other for-profit lenders to be a borrower or saver. Instead, you can save with and borrow from credit unions, which are community-based, not-for-profit co-operatives which are owned by, and operated for the benefit of, their members.

Credit unions provide savings accounts and unsecured personal loans to people who share a common bond, such as living in the same area or working in a similar occupation. As non-profit-making organisations, credit unions provide terrific financial help to the public, especially to people on low incomes and those who have been rejected by high-street lenders. Two in three adults are eligible to join a credit union, plus there are almost six hundred to choose from, with a handy search facility here.

8.Zopa

If you find it awkward or impersonal to borrow from faceless institutions, why not borrow directly from individuals? For example, earlier this year I opened my own bank ("BankOfCliff") with the help of online exchange Zopa. By cutting out the middlemen (banks and other lenders), I'm able to offer low-rate loans to individual borrowers, while earning superior returns on my spare cash.

Through Zopa, you can lend upwards of £10 over periods from one to five years to as many borrowers as you'd like. For example, I've lent thousands of pounds to scores of different people throughout the UK (as far-flung as Aberdeen and Plymouth), in amounts ranging from £20 to £50 at a time. What's more, no borrower has paid more than 6.9% APR to grab my spare cash, and many have paid rates as good as or better than the cheapest personal loan. Beat that!

9. Find out why

When I was up to my eyebrows in debt and struggling to make ends meet, it came as no surprise when yet another of my frequent applications for credit was turned down, so I never bothered to find out why. Nowadays, as a sensible saver and fanatical stock-market investor, I "don't do debt", so my borrowing is restricted to making money from 0% deals and cashback credit cards.

Nevertheless, when my applications for credit are turned down, I usually enquire to find out why. Although lenders are wary about explaining their lending decisions in detail, some will hint at the reasons why an application failed. Often, providing further information can tip the balance in your favour, causing a rejection to become an acceptance, so be sure to provide as much information about your personal financial situation as you can.

10. Understand 'typical' APRs

Around eight out of ten personal-loan providers now use 'risk-based pricing', which means that the interest rate that you're offered depends on your personal financial circumstances. In other words, the most creditworthy applicants get the lowest rates, whereas borderline customers are asked to pay more for the same loan.

However, this system is far from perfect and is open to manipulation. For example, lenders must offer their advertised 'typical APR' to two-thirds of borrowers. One lender I know of does this by rejecting seven out of ten applications, giving its attractive headline rate to two accepted borrowers, and offering a higher rate to a third successful borrower. Hence, two out of three borrowers get its great rate, but eight out of ten applicants don't!

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