Turned down for a debt consolidation loan or re-mortgage

Most lenders will use the services of a credit reference agency (CRA) when making a decision on whether to lend money to an individual. There are three main agencies in the UK, namely Callcredit, Experian and Equifax. These businesses collect information about individuals such as their current and previous addresses, electoral roll subscriptions and previous credit history.

When someone applies to borrow money the lender gets a data report from one of the CRAs which it then uses to decide whether it should lend money. It can also use this information to help it decide how much it should lend, and at what interest rate. All of this decision-making is normally entirely automated in the lender's underwriting software.

In the US and other countries they use a system of positive credit scoring whereby each person improves their score by reliably borrowing and paying back over several years. In the UK we use a more negative scoring system instead where the lenders are looking for warnings of possible risk such as missed payments.

Each lender can choose how to interpret the data file they receive, and which particular data elements to look at. Sometimes they will make simple yes / no decisions, other times they will ask for more clarification if they consider a particular element to be risky. Sample reasons to consider a credit file to be risky include the following:

• Several recent applications for credit. This suggests that other lenders have been turning this person down.
• Mortgage arrears. The credit file includes information about number of months in arrears.
• Other arrears, missed payments and unpaid debts
• Legal proceedings such as CCJs and bankruptcy

Any record that is entered on someone's credit file will remain there for a period of six years, after that the record is archived and will not be visible when the file is next requested by a lender. Should any individual want to see their credit file at any stage they must be given access to it by law. A paper copy, or 'statutory credit file', can be requested from one of these CRAs and must be provided for no more than £2. It is also possible to view a report online although this may cost more.

• Callcredit Online
• Experian Online
• Equifax Online

In addition to external credit reference agencies (CRAs), most lenders will use some of their own internal parameters and data to help them make decisions about lending.

Blacklisting is one of the most commonly misunderstood concepts. This is often used by debt collection organisations in an attempt to encourage an individual to promptly repay what they owe. There is not one central blacklist which all banks use. Each lender has its own blacklist of people to whom it will not lend because of prior borrowing issues.

Risk scoring is another technique that lenders use to make decisions on lending. Various lenders do this differently, however it will normally include collating data from both internal and external sources and calculating a score (for example out of 100). This score is then used to influence how much money can be borrowed, and at what rate, if at all.

Banks are not obliged to tell consumers what risk scoring methods they use, or whether a particular individual is blacklisted or not.

Unsecured credit is the name given when the loan is not guaranteed against an asset such as a poperty or car. In most cases this type of credit is a personal loan, credit card or store card. Unsecured credit is governed by the Consumer Credit Act 1974, and has a maximum upper limit of £25,000.

The amount that someone can borrow from a secured loan or re-mortgage is limited by the value of the equity in the property. Equity is the amount of the property which is owned by the household and not by the bank and can be calculated by taking the value of the property minus the mortgage amount, and minus any other secured borrowings.

For example, if a property is worth £100,000 and the mortgage balance is £50,000 then the equity is £50,000.

As a rule banks will never lend more than the amount of equity, and in fact they will always make sure they leave some equity in the property to make sure that the property is always worth more than the amount borrowed against it. This helps them control the risk, for example, of the property value dropping - they want to make sure that they would always be able to sell the property and have enough money to pay off all of the mortgage and other loans.

The way that lenders control this risk in the UK is by lending up to a certain maximum percentage of the value of the property, say for example 75% or 85%. This percentage is called the Loan To Value ratio (or LTV). The LTV ratio that lenders allow varies on a case-by-case basis - a riskier loan may require a low LTV ratio, or alternatively if a higher LTV is required the lender may choose to charge a higher interest rate.

So for example, if a property is worth £100,000 and the maximum LTV ratio is 80%, the mortgage can increase their borrowing up to £80,000. Hence if the mortgage balance is already £50,000 then the most that can be borrowed is another £30,000.

Some lenders include an affordability calculation when making a decision on lending. This is a basic check to try to make sure that monthly payments can be made reliably.

There are two main types of calculation for affordability, one is based on monthly disposable income, and the other is based on a multiple of annual income.

In order to work out monthly disposable income, a lender may go through an income and expenditure fact finding exercise. This exercise essentially adds up all monthly income (after tax) coming into the household, then takes away all monthly outgoings (such as rent, bills, food, etc.). The resulting 'disposable income' figure is then compared against the monthly repayments required on the borrowing. For example, a certain lender may only lend up to a point where monthly repayments are 50% of disposable income.

The other type of calculation is based on annual income (before tax). For example, a mortgage lender may lend up to four times the annual of an individual, or up to three times the combined income of a household. Equally, an unsecured lender may decide that the maximum borrowing of an individual can be limited to a percentage of their annual income.

There are certain segments of the population whom most mainstream lenders consider to be either too risky, or too complicated to lend to. For example, those who have had previous issues with debt, those who are self-employed or those who require borrowing for a specific purpose such as a buy-to-let property.

Approximately 70% of the UK adult population conform to the basic parameters of conforming lending. For the remaining 30% of the population there has been an emergence over the last few years of a number of companies and lenders who specialise in non-conforming lending.

These companies are able to lend money, or find someone who can lend money even if the circumstances are difficult. In return for this extra work and extra risk the borrowing is often more expensive and there can be set up fees incurred for the intermediary.