Can’t Get A Credit Card, Even With A Good Credit History?
Although some people get into difficulties with their credit card, there are millions of cardholders out there who undramatically keep their accounts ticking over. They always pay on time, never rack up unsupportable debts, and generally appear to be model credit card users. Their credit histories are pristine, with no adverse information on them at all.
You’d think that these financially responsible people would have their pick of the cards on the market, as they present such a minimal amount of risk to the card issuers. Why is it then that so many people with apparently good credit ratings are struggling to be approved for a new credit card?
The answer lies in the process of credit scoring, which is used by all card issuers when deciding whether or not to approve an application for a new card. During credit scoring, each aspect of your financial circumstances and history is given a score, and these scores are added together. If your total score is high enough, then your application will be approved.
The key point to note here is that, contrary to popular belief, your credit score is not a measure of how risky it is to lend you money – it is actually a measure of how much profit you’re likely to make for the bank.
Good And Bad Credit Card Customers
From the bank’s point of view, the perfect cardholder is one who spends up to the account’s limit, and while always making their payments on time, they only pay the minimum required. This keeps the debt as large as possible and therefore earning as much as possible for the issuer.
Customers who rarely use their cards, and who always clear their balances each month, present little opportunity for profit to the banks. Indeed, they may actually end up costing the banks money, due to admin costs and the like, especially if you take rewards programs or cash back dealsinto consideration.
If during the credit scoring process the bank determines that you are one of these types of customer, your application may well be refused – even though you present no risk, you also present little potential for profit!
The ‘credit crunch’ has only made this situation worse. Customers who don’t generate profit are now seen as a burden, and a waste of the limited funds the banks have to extend to customers. When the total lending power of a bank is restricted, then naturally the priority is given to the most profitable accounts.
This effect can be clearly seen in egg plc’s decision to axe over 160,000 accounts, saying they no longer wished to lend to their ‘riskier’ customers. Many of those whose accounts were closed were surprised by this description, saying they had never presented a risk through late payments etc.
The bank’s wording makes sense however when you take ‘riskier’ to mean risking total profits rather than bad debt.
So, if you find yourself struggling to get a new credit card yet you don’t have a history of bad debt, then don’t panic that your credit rating has mysteriously been damaged. By all means check your file for any unwanted entries, but it may just be that you’re too responsible a credit card user for the banks’ tastes!