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Credit reference agencies, such as Experian, have come to play a significant role in most people’s lives. We tend to interact with them at the point of applying for credit, whether that’s a mortgage or personal loans. However, while most of us have had some interaction with credit reference agencies at some point there is still quite a lot of misunderstanding about how they actually work.
According to the World Bank “credit reporting…allows lenders to evaluate the borrowing capacity of clients. And lets good borrowers benefit from more and cheaper lending.” Today, credit reference agencies have two main purposes: to help lenders make decisions that are fair, consistent and well informed and also to help prevent financial fraud. There are three agencies in the UK: Callcredit, Equifax and Experian.
Banks, other lenders, building societies, mobile phone companies and retailers are some of the main organisations that use credit reference agencies. The information that is provided to these enterprises enables them to make a fairly swift decision about whether or not to offer credit to a consumer. The available data provides insight into whether the person making the application can afford the credit that they want and, crucially, whether they are likely to be able to repay it.
They must be authorised by the Financial Conduct Authority and credit reference information must be stored and processed in accordance with data protection legislation. Complaints about agencies are made to the Information Commissioner’s Office or the Financial Ombudsman.
There are two main sources of data for credit reference agencies: public information and information that has come from a credit account.
Public information – this includes the Electoral Roll, as well as information on court judgements and bankruptcies from government services such as the Insolvency Service.
Credit account information – this is information from other lenders about their customers. This is effectively a combined copy of all the information that individual lenders have about someone, held in one accessible place. Only lenders who are members of a scheme called CAIS (Credit Account Information Sharing) have access to this information.
When it comes to credit account information, yes. When an application for credit is made to a lender there will usually be a requirement for the borrower to give that lender permission to share information with other lenders. If you read the small print of your last loan or credit agreement you will find that permission written into the terms.
With respect to the public information that credit reference agencies hold there is no requirement for consent as this is already public knowledge.
Nothing. The data is simply gathered together in one place and then held there for lenders to access when an application is made for credit. The agencies themselves don’t actually process the data or package it up. It’s actually the provider of credit who uses the data to help them decide whether credit should be extended to the applicant.
Lenders are legally required to keep a record of all the searches that are carried out. Every time a search is made against an individual it leaves a ‘footprint’ that other lenders can see (although lenders can’t see who has made the search and will only see credit searches and not non-credit searches such as an identity check). This information forms part of the decision making process for lenders. For example, if an individual has a lot of footprints against their name in a short space of time this could be an indication of someone applying for credit that they can’t afford. In some circumstances, a so-called “soft search” can be done that does not leave a footprint.
Credit reference agencies are quite limited in terms of what they can and can’t do with the data they receive. There are some common misconceptions about this – in particular, what these agencies don’t do with our data:
Amanda Gillam is Solution Loans's General Manager and has been since 2009. She is also a prolific writer on personal finance issues, and has been quoted numerous times in articles published on 3rd party websites and in press releases. Her...Read about Amanda Gillam
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