In a previous post I mentioned the possibility of being able to strengthen an individual credit score by transferring a credit card balance onto multiple cards. I.e. a £5,000 balance transferred across 5 cards by putting £1000 on each.
This may not be advisable in the UK.
The information I was originally working from was based in the US and discussed something called ‘credit-utilization ratio’ which suggests that if you have lots of credit at your disposal, you’re only using a relatively small amount of it and you’re managing it successfully, you will be regarded as a fairly safe risk when it comes to credit.
This suggests that if you have 5 cards, each with a limit of £5,000 and only have £1,000 balance on each, which leaves you with £20,000 of available credit, you are responsible with your borrowing and credit use. This makes sense; you’re not maxed-out so why should you not be considered for more credit?
Not so in the UK.
It would seem (having spoken directly with Experian on this) that individuals with large amounts of available credit may actually be declined for having ‘too much credit’.
The thinking behind this is if an individual has 5 cards with a £5,000 limit for each and only £1,000 balance on each with £20,000 of available credit, why do they need more?
This research suggests that people may be refused further credit if they’re not making full use of the existing credit available to them.
This seems harsh and unfair because the interest rate on most credit cards (not 0% offers) is much higher than that of a loan. So someone wishing to clear their cards with a lower rate loan could end up being declined by some lenders and be unable to benefit from the best available rates.
However one argument for this way of thinking that does make sense is that if the person with the available credit of £20,000 went out and spent the lot, they could very well find themselves in dire financial straights and unable to repay.
Some lenders will refuse further credit on this basis because if they were to provide a loan and the borrower then went out and maxed out their cards it is unlikely that the loan would be repaid in a timely fashion.
Of course what determines if an individual is approved for credit is set out by the lender, not the credit reference agency. Credit reference agencies only compile data, it is up to the lender to make a decision based on the information and lenders have varying criteria.