Credit refusals hampered access to basic financial products during Covid, study finds

Application declined in 2020? You weren’t alone, but maybe not for the reasons you think

Since the virus hit in March, 12% have applied for some form of credit (Getty/iStock)

A fifth of all those who applied for the most common financial products were refused by providers in 2020, severely affecting consumers’ ability to access basic accounts. 

Almost half of those who were refused mainstream lending in 2020 had never been denied before, according to data from Royal London – as lending criteria on personal loans, credit cards and overdrafts tightened.  

Since the virus hit in March, 12 per cent of UK adults have applied for a credit card, personal loan, an overdraft or overdraft extension, with credit cards the most popular form of borrowing at 8 per cent.

But with almost one in 10 UK adults applying for benefits during 2020 – almost half for the first time – and 15 per cent of the population still with less than £500 in savings despite nationwide efforts to set cash aside, borrowing may feel like the only option available to many.

And while responsible lending is a crucial component in helping people out of problem debt, anecdotal evidence suggests the measures have hit those trying to manage their otherwise sustainable finances hardest.

One individual, who wished to remain anonymous, said: “I was turned down by my bank of 20 years for an overdraft even though £6,000 a month goes through [my account].”  

Another commented: “Even though we had more than £600,000 of equity in our property, to borrow an additional £25,000 took weeks of telephone consultations with our mortgage provider. 

“The whole process from start to finish took four months due to wariness on their part about meeting their financial criteria and because of Covid delays.”

A quarter of adults who tried to take out a financial product during the pandemic found it harder to do so than before the virus.  

Almost a fifth of UK adults are now less confident about meeting qualifying criteria than they were before the pandemic.  

The study also found that when it comes to government benefits – which almost one in 10 adults applied for during this year –  30 per cent had part or all of their application rejected here too.  

“It felt like I’d done something wrong by asking for help,” one interviewee admitted. “It was humiliating in my sixties to have to ask for help.”  

“This year has been incredibly difficult for everyone, not least because many people have experienced an unexpected change in their financial circumstances,” said Sarah Pennells, head of financial capability at Royal London.

For some, it’s been made worse by the fact they’ve been turned down for products such as personal loans and credit cards – often never having had a problem before. In addition, many are trying to navigate the benefits system for the first time and are not always given the help they so desperately need.

Recent figures from the Office for National Statistics show redundancies at a record high and fears over what will happen when the job furlough scheme finally ends mean benefit applications are likely to soar. 

Providers will continue to demand applicants jump through tighter hoops if they want to avoid, for example, extortionate fees on unarranged borrowing in 2021.  

But applicants may be surprised by some of the other reasons for their rejection – often badly conveyed or not communicated at all at the point of refusal.  

In 2019, four in every five consumer credit applications was refused due to a lack of data rather than poor credit histories or genuine affordability concerns, according to a separate study by credit reference agency Aire.  

An analysis of the experiences and credit histories of thousands of UK consumers found that UK lenders declined up to 1.8 million consumer credit applications worth £10.6bn last year. 

But the credit reference agency believes that up to 80 per cent of the rejected applications could have been accepted without increasing lenders’ appetite for risk or burdening consumers with more debt than they could afford to take on at that stage.  

Among the 2019 rejections were 721,000 applications from borrowers with spotless credit histories and 258,000 from people whose disposable incomes after everyday expenses exceeded £1,000 a month.

Limited UK credit histories also led to the rejection of 541,000 applications form retirees who had paid off their mortgage more than six years ago, 386,000 from recent migrants to the UK and 283,000 from young professionals.

Aire's study also indicated that a third of people applying for subprime credit products such as payday or home collection loans did so because they were rejected initially by mainstream lenders.  

Improving acceptance rates for mainstream products would provide other options for consumers forced to use sub-prime products today, said Aneesh Varma, founder and CEO at Aire.  

“There is an undeniable problem at the heart of the UK credit system. The majority of people denied credit are not declined for historical credit risk or affordability problems, but due to a lack of data to inform lending decisions. For lenders, the impact of this problem is commercial, they’ve been missing out on billions of pounds a year in missed opportunities. But for the millions of people excluded from the credit system, many of whom are responsible borrowers and would make excellent customers, it’s deeply personal.”

The research also found that, prior to the economic challenges brought about by Covid-19, up to 17.5 million people in the UK would have struggled to access mainstream credit products due to a shortage of historical credit data, or because their lifestyles were not compatible with older credit decision-making systems.

Among those most affected were 800,000 recent migrants and 900,000 young professionals without UK credit histories, as well as 1.5 million gig workers. 

More than 2 million retirees and around 900,000 returning expats, whose most recent use of credit in the UK fell outside the six-year window seen by traditional credit bureaux, were also affected.

Varma added: “The pandemic has only underlined the multiple data gaps many have experienced for years within the credit ecosystem. 

“Traditional credit bureau data is simply not dynamic enough to fairly represent the lives of consumers today – a lag that, in the current climate, throws any useful indicators of creditworthiness or affordability into freefall.

“With financial situations now prone to even faster change, many more consumers are likely to be rejected for credit as lenders struggle to get a handle on the financial health of their customers.”