What Is An Affordability Rating?

For years in the UK, whenever you have applied for credit, such as a loan, home loan, credit card, etc., the credit provider has always undertaken a credit rating test to determine whether or not they consider you a safe or unsafe credit risk. While being of a somewhat secretive nature, traditionally this has involved a process known as ‘credit scoring’.

Since 2000, however, an increasing number of credit providers have moved away from the more traditional method of scoring your credit risk to a new calculation method, known simply as your affordability rating. Given that the amount you may be able to borrow could be dramatically affected by this change in scoring your potential credit risk, what is an affordability rating; and, how does this method of rating your potential credit worthiness differ from the more traditional credit scoring method?

A credit scoring credit rating

Historically, whenever you wanted to borrow money in the UK you were required to complete an application form in which you put down details of your income, debt and assets. The potential credit provider would then obtain a credit report on you from one of the credit rating agencies and together with your application form would input the data into a somewhat complex and secretive computer program which would then determine the risk of you repaying the line of credit being considered. This system was known as the credit scoring method and would highly popular among credit providers from the early 1980s onwards.

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An affordability test

Since 2000 a growing number of credit providers have seen a flaw in the credit scoring scheme and have decided to move away to the new affordability test. Under this program, no longer are you simply required to inform the credit provider of your income against out-goings in your application form, but you now need to detail what all your commitments are. This may not sound too far removed from the old credit scoring system. However, under the new affordability system, you need to inform the credit provider of your income, outgoing and the number of dependents you have, including whether or not you have long-term maintenance payments to make. They may even ask that you provide additional evidence, such as bank statements, to collaborate the information you put in your application.

So, how does this change things?

The truth is, if you are a single man living alone then you may not expect too much to change. However, if you are a married man with a couple of young children, or if you are a recently divorced man, then you may find that a lot changes with the new affordability credit rating scheme. Why might this be so? Simple really, under the old credit scoring scheme you merely have to detail your income against expenditures.

However, under the new affordability scoring scheme you’ll need to include information about your wife (or ex-wife) and children (and whether you are paying maintenance or not). If your wife is a “stay at home mum”, then she has just become an item in the expense column of your application form. The net gross earnings from which your credit worthiness would have been determined has, potentially, now been severely curtailed.

Will things change that much?

It may seem a little alarmist to speculate about the new affordability credit scoring method. However, given that less than 10% of all credit providers used the scheme prior to 2000, and given further than in 2005 over 50% of all credit providers accepted using some form of affordability testing in their credit scoring, the tide seems to have certainly changed. And where does that leave you, the potential borrower? The answer is, as prudent long-term financial planners, you may now need to think about taking out large long-term debt, such a home mortgage, before you get married and have children. Because, you may not be able to afford the same home mortgage afterwards. Perversely, if your wife is not working, this could still even be the case if you were earning more after you got married than you were before you got married.

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