High Street banks are cracking down on borrowers with poor credit ratings, in some cases refusing loans and mortgages to those with only minor blemishes on their record. The move, in response to rising wholesale borrowing costs and bad debts, means that lenders are looking deeper into borrowers’ credit histories and tightening their eligibility criteria.

Experts say that the crackdown will make it harder for borrowers to obtain credit. Figures from The Mortgage Lender, the specialist broker, suggest that about 40 per cent of all mortgage applicants are likely to be classified as “problem borrowers” and will face higher interest rates or may be declined altogether. This is an increase on the 15 per cent of applicants who would have been considered a risky prospect for lenders only 18 months ago.

David Titmuss, of The Mortgage Lender, says: “Before Northern Rock and the so-called credit crunch people could find a mortgage even if they were severe defaulters. Those days are over and many people will be shocked when they apply for a loan or mortgage and are either given a higher than expected interest rate or even declined.”

With lenders battening down the hatches, those shopping around for a credit card or a mortgage will need to ensure that their credit rating is spotless. Jonathan Correll, of Hamptons International, the mortgage broker, says: “Borrowers today have to make sure they are whiter than white. If you have so much as a wrinkle on your record the lenders will say no.”

Mr Titmuss says that borrowers will be ineligible for a loan if they have missed so much as one payment on a credit agreement in the past three years. This applies even if you have entered into a loan with your spouse and later become divorced or separated and your ex-partner has missed a payment.

Neil Monroe, of Equifax, the credit reference agency, says that you must keep up to date with credit card payments and mobile phone bills and stay within your bank overdraft limit.

Failure to do so can result in a county court judgment (CCJ) against you, which can be the kiss of death to a loan application. A CCJ, which stays on your credit record for six years, can be requested by a creditor and granted by a court in your absence.

However, there are ways to safeguard your credit rating and, where you have had problems in the past, rebuild your creditworthiness. Here Times Money explains how.

Know your credit record A copy of your credit reference file can be ordered online for a small fee from the three main agencies, which are Experian (www.experian.co.uk ), Equifax (www.equifax.co.uk ) and Call Credit (www.callcredit.co.uk ).

Work to repair your credit record Using credit cards and mobile phone contracts wisely, without incurring charges or penalties, can help you to rebuild your creditworthiness. If you are able to secure a mortgage, make sure you do not go into arrears.

Keep your address up to date Failure to redirect your mail can mean that lenders are unable to contact you about outstanding debts that you may not know about. This can lead to a CCJ against your name. Ensuring that you are registered on the electoral roll will also help lenders to contact you. To do this, contact your local council.

Dealing with a CCJ If your finances have gone awry and you have CCJs against you, pay off the debt in full and make sure that records at the Register of County Court Judgments are amended.

Use a broker or specialist lender A low credit rating will not act as an automatic bar to obtaining a home loan, although you will have to pay higher rates of interest. If you keep up with your repayments you may become eligible for cheaper deals when you come to remortgage.

Further advice Useful information and advice is available from National Debtline (0808 808400, www.nationaldebtline.co.uk ) and the Consumer Credit Counselling Service (0800 1381111, www.cccs.co.uk).

CASE STUDY

Amanda Williams, of Cardiff, was declined a new mortgage with her exisiting lender, NatWest, when her fixed-rate deal came to an end in May. The bank cited a problem with her credit rating as the reason.

Ms Williams, left, has never defaulted on her mortgage, but her credit record, which she obtained from Experian, the credit reference agency, says that she has made late payments on her NatWest credit card and a catalogue subscription.

After contacting London & Country, the mortgage broker, the 36-year-old civil servant was given a five-year fixed-rate mortgage at 5.79 per cent with Abbey. She says: “What really annoyed me is that NatWest didn’t tell me what was wrong with my credit record. Abbey didn’t seem to have a problem with my record.”

James Cotton, of London & Country, says: “It pays to shop around. Some lenders have been more fussy than others in the past, but it is becoming increasingly difficult to secure a mainstream loan if there is even the slightest problem with your credit rating.”

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