How lenders give you the credit

Three companies hold information on almost every adult in the country – and pass it on without our knowledge to financial organisations such as banks and insurance companies, even to mobile phone operators, whenever we try to do business with them.

The outfits that hold this data on their computers are called ‘credit reference agencies’ and they are the oil that makes the wheels of instant credit and easy loans run smoothly. But the price we all pay is a loss of that fast disappearing right – personal privacy.

Information
A lot of the information these agencies hold is publicly available. They verify our address from the Electoral Register which lists every voter in the UK. Even though you can now tick a box to prevent marketing companies getting hold of this information, credit reference agencies still get the whole list. They match it with information from the courts throughout the British Isles on judgements for debt, bankruptcy orders and individual voluntary arrangements supervised by the courts. The confidential information about our finances is provided by the banks, building societies, insurance companies and others who subscribe to their service. All the information stays there for six years and the subscribers use the data to assess your creditworthiness when you want to borrow money.

Most of the information is about your debts and how promptly you pay them. All your credit cards are listed together with the credit limit, what you owe, and how often your monthly payment was on time, late, or unpaid. Similar information is collected for all your other credit arrangements – including mortgages, catalogues, store cards, or car loans. Mobile phones on monthly payment plans sneak into the system because they in effect lend you the cost of the calls which you then pay at the end of the month. BT, gas, electricity and water bills are not listed for legal reasons – but they are lobbying to have these restrictions removed.

Assessment
Whenever you apply for a loan, a credit card or even a bank account the lender will use the information on your application form and the credit data to assess whether to lend you money and, if so, on what terms. That is assessed by whether you have borrowed in the past and how well you have dealt with that debt. Paying the correct amount on time each month is excellent; going bankrupt is terrible. Most of use are somewhere in between. Even applying for lots of loans or credit cards in a short time – even if you do not take them up – is bad because it may mean that you have suddenly hit a financial problem and you want to borrow your way out of it. Strangest of all having no loans now or in the past is very bad; you have no credit record so no-one knows if you are a good risk or not. The lender will use this information to produce a credit score from 0 to 1000, the higher the better. Those scores are secret, but for a fee the credit reference agencies will now work out a score for you. However, that is not necessarily the same as the lender will calculate. And lenders will also use other information from your application form.

Nowadays, the answer to a credit request may not be a simple ‘yes’ or ‘no’. More and more banks use what they call ‘risk-based pricing’. In other words if you have a poor credit score you may still get the loan or the card but you will be charged more for it. There is no ‘credit blacklist’ — however bad your record someone will lend you money at a price. Barclaycard for example has numerous rates on its cards starting at 6.8% which it offers to its ‘excellent’ credit risks going up to 27.9% for people with a poor credit history or none at all.

More information
Recently the banks have realised that some people with good credit scores can in fact be bad credit risks. For example, someone who had lots of credit cards and borrowed far more than they could afford may still be paying the minimum repayment on time each month and appear to have a good record. That could lead to more credit being given. Eventually of course the whole house of cards will come tumbling down. That can give the bank very bad publicity – a recent Panorama programme on BBC television claimed that in the last three years there had been 17 debt related suicides. Many had debts from High Street banks of several times their income.

So there is a move now to use not just ‘negative’ data about missed payments but also ‘positive’ data about income and total debt. That allows the lender to estimate whether you can afford the loan you are applying for. This new approach is still in an experimental stage. But four of the High Street banks are now sharing data on current accounts and overdrafts held on them. And some are also beginning to use a new ‘indebtedness’ score produced by one of the credit reference agencies.

Data protection
By now you are probably wondering how 350 million active credit records on at least 30 million people, held by three agencies can be passed around scores of companies despite tough laws on Data Protection. When did we give permission for this to happen? In fact, every time we take out credit or open a bank account there is a bit of small print that allows the company to share our data in this way. Of course, we can choose not to accept this condition – but if we do, the offer of the loan will be withdrawn. People with current accounts they opened more than a few years ago will not have agreed to data sharing. The banks are lobbying for these older accounts to be included without that agreement.

Corrections
If you are refused credit, the lender you applied to is supposed to tell you why. But very often the reason they give will not explain much. It could be because of your credit record – perhaps you have no loans and no credit history, or you have missed payments on a number of loans, or you have suddenly made several enquiries about borrowing money. Or it could be because of your age or other factors that are not to do with credit scoring.

If you think your credit record may be wrong, it is simple and cheap to find out what is on it. Under the Data Protection Act the agencies have to send you a copy of the data they hold and they are only allowed to charge you £2 for it. Of course, they try to sell it to you for more, offering all sorts of other services. Ignore them and insist on paying just £2. Almost all financial institutions use all three agencies, so if you get one record it is likely to tell you what is on all the others. But even all three credit records will cost you just £6.

If there is information on it which has been provided by a financial company or the courts which is faulty you will have to write to the provider to get them to change it. That can take a long time. Alternatively you can write to the chief executive of the credit reference agency pointing out the error and state that if the company continues to publish this untrue and defamatory information you will sue. If the information is correct but you fear that it will be wrongly interpreted – you missed several payments for example because you were abroad or had just been bereaved or lost your job – you can add to your record a ‘Notice of Correction’. You can state your case in up to 200 words.

Nowadays, your record should not contain information about anyone else unless you have a genuine financial connection with them – for example a joint mortgage or bank account. The record of someone you have no financial connection with should not affect your credit score. If you are wrongly linked to someone else you can fill in a form to ‘disassociate’ yourself from them and get your records separated.

Some companies offer to ‘repair’ your credit record. None of them can legally do any more than you can do yourself – they will just charge you for doing it. Never use them.

November 2006