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Ft - "lenders Lift The Pass Mark On Applications"

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Growing numbers of borrowers are being turned down for mainstream deals and forced to apply for costlier sub-prime finance as lenders take a much tougher line with consumers in the face of rising interest rates.

Credit reference agencies, which supply lenders with the information needed to make borrowing decisions, say financial institutions are now taking a deeper and broader look at credit histories, resulting in more applications being turned down.

Each lender operates a different scoring system to meet their own assessment criteria, but the cut-off scores for automatic acceptance are moving up across the board, they say.

“The bar has been raised,” says Peter Brooker, of Experian, the credit reference agency. “Whereas some indiscretion in the past may have been overlooked they are less inclined to do so now because of the toughening market and rising interest rates.”

Among the areas where lenders have clamped down is County Court Judgments (CCJs). Whereas a few years ago, black marks of this sort may have been discounted after say two years, this period is being stretched back.

Lenders are now not only taking into account red flags such as missed payments, defaults and IVAs, but also borrowing behaviour, such as withdrawing cash on credit cards, which may indicate cash flow problems.

Multiple applications for credit are also likely to score down an application, as the individual, who may have taken advantage of zero per cent balance transfer deals or innocently applied for finance many times when buying new furniture after a house move, could be viewed as too “credit hungry”.

“Lenders are taking an in- depth look at not only debt history, but the availability of open credit lines as there are big concerns over indebtedness,” says Neil Munroe of Equifax, another credit reference provider.

“They are upping their pass marks to reflect the fact that people have enough credit.”

Barclaycard, one of the country’s biggest card providers with 9.8m customers, confirmed that it was taking a tougher line with its applicants, saying it had lifted its rejection rate from about 50 per cent to 55 per cent.

The lender, which has cards with Sky, Thomas Cook and Argos, says along with missed payments and defaults, a customer could be scored down on a credit application if they had gone into unauthorised overdraft on a current account.

The more conservative approach to lending comes at a time when the burden of taking out a mortgage is at an historic high.

A report by the Council of Mortgage Lenders this week found that first-time buyers in May had to borrow a record 3.37 times their income to obtain a mortgage. Home movers are now borrowing 3.03 times their income.

Mortgage interest payments for first-time buyers reached their highest level for more than 20 years at 19.1 per cent of income.

With interest rates at a six-year peak, an increasing number of consumers with big levels of debt are forecast to struggle to meet their repayments.

“With more defaulting or meeting payments late, more consumers will fall into the sub-prime population,” said Datamonitor, the independent research group.

Consumers who are refused finance by a prime lender have little option but to go to a sub-prime lender which may have less strict criteria, but whose rates will typically be 1 to 2 percentage points higher.

While more consumers could be locked out of high street deals, others with “soft” adverse records, such as missed payments, may find they are offered finance but at a price.

Credit agencies say there’s a growing trend by lenders towards “rate for risk” pricing, whereby an applicant is offered an interest rate which increases as their credit score worsens – meaning that only those with the best credit reports get the headline-grabbing rates.

Lenders say if your bank has refused you a loan, it pays to ask yourself why.

“The consequences of ignoring this warning can be serious and lasting,” says the British Bankers Association.

Copyright The Financial Times Limited 2007

Credit tightening in the UK? Surely not?

Sub Prime in the UK? Surely not?

Housing Crash in the UK? Surely not? :lol:

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