We are regularly contacted by mortgage brokers and other industry professionals regarding their client’s credit files. One thing we hear regularly is my client has no defaults or judgments but they have been refused finance, what’s going on?
The answer is often enquires on the credit report.
Although some brokers are aware that credit enquires can be a problem very few seem to really know why, having an understanding of this is very important as in many cases the client may be highly confused to why their application has been refused and demand answers, this is not a time the broker wants to appear lacking of the facts if they are to retain the client.
To better understand why credit enquires can be such a problem lets look at the process from the client’s point of view, for the sake of this article lets call our consumer Joe.
Joe decides he would like a new credit card but not knowing who has the best deal he jumps online to see what’s on offer.
Joe wants to hedge his bets and make sure he gets approval for a card, so he picks out four credit cards he likes the sound of and applies for them all. After all, Joe doesn’t need to accept them all if they’re approved and this way he’s surely going to get at least one cross the line right?
But hang on, what was meant to be an easy process of getting a credit card is proving to be a bit of problem. Joe can’t explain it but over the course of the next few days he receives knock backs from all the companies he applied to. This seems strange as Joe has a good job and has never missed a payment in his life. Joe decides the companies he applied to must be being picky, so he jumps online again and makes a few more applications. What’s this, more declines? This is crazy!
Joe decides to bypass all this madness and treat himself to a big flat screen television. He pick out a beauty, 55 inches and full HD. What’s even better is the store offers credit; this is going to be easy. Joe confidently gives his details to the store finance representative, the whole time thinking I can’t wait to get this TV home! Then he’s hit with it “finance declined.” Has the whole world gone mad? Why won’t anyone give Joe credit?
What a lot of people aren’t aware of that is each time they apply for finance they are almost certainly going to have someone make an enquiry on their credit report and wait for it, that enquiry will be recorded for five years. That’s right, five years!
While it’s true that a credit provider can’t make a credit enquiry without consent, gaining approval can be as simple as ticking a box on a website or saying “that’s fine” to a credit representative. But hang on, why are credit enquiries that never ended in credit being provided a problem? Surely it only matters what enquiries lead to loans right? You would be forgiven for thinking so but unfortunately the answer is no. You see when a credit enquiry is made, only limited information is held on the credit report. Let’s say Joe made an application for a home loan, the only information recorded is the date and type of the application (in this case a home loan), the credit provider and the amount; that’s it. The enquiry won’t say if the application was approved or declined or even if Joe took up the facility if it was approved. Basically a credit provider who looks at the past enquiries is flying somewhat blind.
Let’s go back to Joe’s situation; let’s say you’re a credit card provider looking at a number of recent credit card enquiries on a credit report. You don’t know if the past enquiries were declined or approved and if approved how many credit cards Joe ended up with. In today’s credit risk adverse world, the outcome of this misinformation is often a decline. Many credit providers will assume past applications have been declined and assume they are not being told everything and will decline the application just to be safe.
In many cases the consumer won’t even get the opportunity to plead their case as many lenders have fully automated credit scoring and these systems are triggered to react to recent enquiries and decline the application without looking into it further. For the most part there are no clearly visible notices on application forms and websites warning people that an enquiry will be noted on their credit report and the possible implications of making multiple applications.
Even if the consumer is aware an enquiry will be noted on their credit file very few realize the potentially debilitating effects a high volume of recent enquiries can have. Often only when the damage is done does this become apparent.
It makes little difference what type of credit is being applied for; home loans, business loans or credit cards, the problem remains the same.
Now we know what the problem is, how do you fix it? Are you sitting down? The answer is you can’t, not in the short term anyway. Unless the enquiry was made without authorization there is little that can be done to have an enquiry removed from a credit file. The only cure is time. The more historic the listing the less relevant it is. For example, a series of enquiries made twelve months ago would not be seen as important as a series of enquiries made over the past month. There’s no set rule for how old an enquiry needs to be before it’s not considered an issue, as each lender tends to carry different lending criteria and this criteria is under constant review.
However there’s no doubt that the older the listing the less relevant it is. This doesn’t help people who have made this mistake but desperately need finance, for them the pain is just getting started.
Given how many people are affected by this problem there needs to be more public awareness around this situation. Something as simple as a clear message next to the “submit” button on a website letting people know that a credit enquiry will be made and a high level of recent credit enquiries could result in credit issues would be a great place to start. Armed with this knowledge I feel most people would apply for credit in a more informed and responsible manner and fewer brokers would be faced with this problem.