Martin Lewis has warned that having what appears to be a 'perfect' credit score does not guarantee you will be accepted for a loan or credit card. The founder of MoneySavingExpert (MSE.com) said one of the biggest misconceptions he comes across is people believing their credit score alone determines whether they will be approved for borrowing.
Credit score 'only half the picture'
In a recent YouTube video, Martin said people regularly stop him to ask why they have been turned down after applying for credit, despite having what they believe is an excellent credit score. The financial guru said: "There's a hidden, but obvious reason many people are rejected when they apply for a loan or credit card."
Martin continued: "I can't tell you the number of times someone has stopped me to say, 'I've just applied for a £5,000 loan. I've got a perfect credit score but they've turned me down - what's going on?'"
Affordability checks key
Martin said the answer is that a credit score is "only half the picture". He explained that consumers do not actually have one universal credit score. Instead, the score people see from a credit reference agency is simply that company's assessment of how a typical lender might view their credit history. Every lender has its own way of assessing applications and will use its own criteria when deciding whether to offer someone credit.
Alongside looking at a person's borrowing history, lenders also carry out affordability checks to work out whether someone is likely to be able to repay what they borrow. Martin said: "The credit score is missing a crucial piece of information - how much you earn. The other side to assessing whether they accept or not is doing an affordability score. Could you actually afford to repay?"
Impact on loan amounts and credit limits
That means someone could be accepted for a smaller loan but rejected if they apply to borrow a much larger amount. Martin said a lender may approve a £2,000 loan but decline the same applicant if they apply for £8,000 because the affordability assessment produces a different outcome. The same principle also applies to credit cards. While a good credit history remains important, affordability checks help determine not only whether someone is accepted, but also the credit limit they are offered.
Martin added: "Even if you've got a perfect credit score, it is very possible that you can be rejected if your income isn't good enough to fulfil the affordability score."
