Affordability rating - specifically how is it worked out?

HDouglas

I imagine this question has been raised before but I can't find anything relevant in the forum -
happy to be re-directed to another thread if the answer I want is there.

I have a good+ credit rating but have the lowest rating of 'very weak' on my affordability score. As I have around 1/3 disposable income I can't understand why. Can anyone tell me what all the factors are that go into arriving at this assessment? I understand I input income and mortgage but there must be some other factors involved as my income is above average and my mortgage low.

I have had problems for some years with this, and I even paid for a credit report so I could 'interrogate' the reasons why with an adviser but still didn't get a straight answer! It does cost me more in rates for loans or credit cards so this is costing me money. I assume it's something to do with how I manage my finances / move money around rather than the overall amounts in my accounts. If I can work out what I'm doing to skew the assessment results then I can potentially do something to change it. Happy to give more details if needed.

Arleen

Nobody knows, at least officially because the formulas are dug behind NDA. But overall the process is that you take people with similar salaries and situations and see how much spare money (after living expenses etc. ) they have on average. From that, you deduct current obligations and see what amount you are left with. They bundle it with how those people spend their money (that is one of the reasons why everyone shares data about your shopping habits), what were their tipping point (with what level of debt they started to fall behind, etc. ) and anything else they can find.

As a result, it can be surprisingly accurate. They have enough data to segregate people into very narrow, and closely related groups, and nowadays that is a lot more accurate than any loan manager can be. Heck, it usually is more realistic about your financial situation than you are yourself.

SparklesJD

Each lender sets their own criteria and there are, as Arleen says, very complex algorithms behind the checks when you apply for credit.

So, lender A might 'accept' you with a certain level of disposable income, but 'decline' you on the level of available credit, for example and lender B might decline anyone who doesn't own their own home, regardless of income (I don't know if that's actual criteria for anyone though!).

With the larger lenders the products are set up centrally and even the employees wouldn't be able to tell you why you've been refused a particular loan and they don't see an individual's credit rating.

I work at a credit union. We get a recommendation of accept, refer or decline and (contrary to popular belief) we do see individual's credit score as assessed by our CRA, although we don't use them.

When looking at affordability, we're looking at income and expenditure and whether the additional expense of loan repayments can be added without hardship - now and as best we can predict for the whole term of the loan. We would also look at account management - if you have an overdraft, are you at the limit every month? How much available credit do you have (i.e. are you going to take the loan from us, then run your CC up to the maximum - if you do, are repayments still affordable)?

This is quite interesting - it's a paper written by Experian on the subject: www.experian.co.uk/assets/corporate/white-papers/affordability-challenge.pdf

SparklesJD

Arleen wrote: »

As a result, it can be surprisingly accurate. They have enough data to segregate people into very narrow, and closely related groups, and nowadays that is a lot more accurate than any loan manager can be. Heck, it usually is more realistic about your financial situation than you are yourself.

According to most people's income and expenditure statements, most people don't need a loan at all!