A million young people in "vicious circle" of credit rejections
More than a million young people have been refused credit more than five times and are turning to payday lenders as a result, new research has found.
Price comparison website, uSwitch.com, found that hard-up Brits are in a "vicious circle" of credit applications and rejections, with nearly a third of people being turned down for credit (32%), a figure that rises to 57% for those aged 18 to 34.
Of these youngsters, 65% have been rejected for credit more than once, while a quarter (25%) have been refused more than five times - the equivalent of more than one million people.
Because of this, youngsters are increasingly turning to payday lenders. Some 40% of those aged 18-34 who have been rejected for credit said they were forced to take a payday loan, compared to just 26% of all other age groups; while 36% of youngsters said they had used pawn shops or cash for gold stores to pay their bills, compared to 21% of everyone else.
Many young people are also unaware that applying for credit multiple times is recorded on their credit report. Half of young people (49%) turned down for credit didn't check their report before applying, while 54% didn't know their landlords had access to the information on their credit report either.
In response to its findings, uSwitch has launched the It's My Report campaign, which calls for everyone to have free access to their full credit report once a year, for companies to be forced to give specific reasons why someone is rejected for credit, and a standardisation of the credit score scale in the UK.
David Mann, head of money at uSwitch.com, said: "Young people are blindly reapplying for credit again and again but don't realise the consequences this scattergun approach has on their finances. To break the endless cycle of credit rejections, they need more information about why they're being turned down and what they can do about it.
"Although it's disheartening when you're rejected for credit, it's important not to reapply straight away but take stock of your situation and find ways to improve it. By checking your credit report before applying or running a soft check with lenders to see if you're likely to be approved, you can avoid those black marks on your record and build a strong score.
Your credit score is a three-digit number (ranging from a low of 300 to a high of 850) calculated from the information in your credit report. Your credit score enables lenders to determine how much of a credit risk you are. Basically, a low credit score indicates you present a higher risk of defaulting on your debt obligations than someone with a high score. If you have a low credit score, any products you successfully apply for will carry a higher rate of interest commensurate with this risk.
A report containing detailed information on a person’s credit history, a record of an individual’s (or company’s) past borrowing and repaying, including information about late payments and bankruptcy. It also includes all applications a person has made for financial products and whether they were rejected or accepted. Your credit report can be obtained by prospective lenders to determine your creditworthiness.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.