If you have ever attempted to obtain credit in the UK, one reoccurring theme that you'll have been told time and time again is to ensure that you have a good credit rating before applying. To this end, you may even find that you're recommended to get a report before you apply for the credit. This does, however, beg the question of whether or not it is possible to have too good a credit rating to apply for credit in the UK?
What is a credit rating?
A credit rating is a rating given to you by an agency which summarizes your risk of not repaying the credit provided to you. The rating is given by one of the agencies to a potential lender and is based upon your previous ability to make payments of your debt in a timely manner.
Thus, if you have a personal loan, and fail to make a scheduled repayment, the lender will notify the rating agency and the credit rating agency will adjust your credit rating to reflect the fact that you have previously failed to make a repayment. Fail to make enough payments in a timely manner, and your credit score will be so shot few lenders will be willing to take the risk of lending you any credit without either adequate security or at high interest rates. This all sounds fair enough, but how can your credit score ever be too good to obtain credit?
The pitfalls of having too good a credit rating
Now, let's assume you have been a model borrower and have repaid all of your debts timely and in full. In other words, you have never defaulted on any payment in your life. How can this work against you?
Well, imagine you are a UK credit or charge card provider.
Before you sits two applications (for either a credit or charge card). The first applicant has an exemplary credit rating, never having defaulted on any repayment. The second applicant has a middling credit rating, having often defaulted on making a repayment on time, but never having default in full; i.e., having repaid the debt in the end. Which of the two would you approve? Instinct might make you think the first, but practice will tell you that the credit or charge card provider is much more likely to approve the second. Why? Simple really, the first applicant, while certainly showing signs of being a good customer also displays tell-tale signs that the credit card provider is not going to make a huge profit from this customer.
In the case of the second applicant, however, you can feel fairly confident that they will not be repaying their outstanding balance in full each statement payment date and that there is a good chance they'll carryover a balance, which will eventually be repaid. In short, the second applicant is your ideal customer.
Not that we would wish to advise you to reduce your UK credit rating in any way, but if you have recently applied for a UK credit or charge card and have had your application rejected, then maybe should not be asking "what's wrong with my credit rating?", but instead be asking yourself whether or not your credit rating could possible be too.
