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Last Updated: Tuesday, 4 October 2005, 10:39 GMT 11:39 UK
How credit card firms assess borrowers
MONEY TALK
By Malcolm Hurlston
Founder of the Consumer Credit Counselling Service (CCCS)

Malcolm Hurlston
Malcolm Hurlston, founder of the CCCS

The financial peril of multiple credit cards debts is a growing concern. The founder of a leading UK debt charity explains how the process works and sheds light on how people on modest incomes can get into so much debt.

Nowadays it is usual to have a credit card. Many people have several and a fair number have far too many.

Credit card companies give the appearance of being anxious for custom, the more so since home mailings are intrusive compared with the advertising which most people manage to screen out.

The first stage towards holding a credit card is filling in application form, with personal and domestic details.

Other questions cover current income and expenditure and financial obligations.

People keen to have a card are sometimes tempted to massage the details, but this never makes sense.

Much of the detail can readily be checked and falsification will lead to a refusal.

Credit checks

All credit card companies rely on more than the application form, although it is their main source of information.

They go to credit reference agencies - of which there are three in the UK - to check name and address details against the electoral roll.

Credit reference agencies have a full file of judgment information covering all jurisdictions in the UK and going back six years.

Through them lenders also share information amongst themselves, particularly about people who are having difficult with repayments on current loans, but also about people who are making frequent applications, balances and repayment histories.

Although credit card applications appear to land unpredictably on the mat (some indeed addressed to the cat) there is much more science to it than you would believe from reading the papers.

Profitable business

At one stage the existence of a county court judgment on your file was so potent you would be extremely unlikely to be offered any kind of credit card.

But now it now longer rules out the possibility, thanks to a dubious combination of factors such as market saturation, competition and financial inclusion.

Each credit card company has its own scoring system and gives a score to each item of information it has received - either from you on the application form or about you from the credit reference agency.

Think about how you will manage the monthly payments
The scoring depends on the characteristics of the type of customer whom they are seeking at the time - for example, high spenders, heavy borrowers or people with previous difficulties.

That is why the same details on an application form - and the same details on the credit reference agency files - can produce different results from different lenders, or indeed from the same lender at different times.

Credit cards are profitable for lenders in a variety of ways: they can make money from the number of times you use your card, or from the interest they charge when you have a balance outstanding.

Some count on you having difficulties and facing penalty charges. That is why people on low incomes can find themselves being offered more credit than may be good for them.

Offer declined

In the end only you know what is best and your common sense will tell you. The lender has limited information about you from the application form and has to guess the rest (with the help of scoring).

But you know yourself and your own financial position.

If you are declined, the best answer is to look elsewhere for another offer. But if you want to take the matter further you can always write in, particularly if you have more information to offer.

Or you can ask to see whichever credit reference agency file has been used (it will cost you only 2 under the Data Protection Act).

Standards of accuracy are high but some mistakes are inevitable and a correction could lead to your being re-rated.

Beware of companies who offer to improve your credit record for a fee. All the worthwhile corrections can be made free of charge.

Whatever your circumstances, whether you see a credit card as a means of payment or an avenue to credit, think about how you will manage the monthly payments.

They will vary by how much you spend and the penalties you may face if you run beyond the interest-free period or, worse, become liable for penalties and charges. The more cards you have, the more demanding it will be.

The CCCS can be contacted on freephone 0800 138 1111.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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