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.
Why do credit reference agencies exist?
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.
Who uses credit reference agencies?
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.
How are credit reference agencies regulated?
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.
Where does the data come from?
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.
Does there have to be consent?
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.
What do credit reference agencies do with the data they have?
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.
Who can see the searches against my file?
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.
What don’t credit reference agencies do?
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:
- Make lending decisions – credit reference agencies provide data with which lenders can make decisions about whether to lend. However, the agencies themselves don’t make these decisions.
- Advise lenders – there isn’t any element of advice when it comes to the relationship between lenders and credit reference agencies. The information collated is presented without any obvious bias.
- Create blacklists – agencies don’t compile ‘blacklists’ of people who aren’t suitable for credit.
- Receive data on whether or not credit applications are successful. Although eventually, new loan or credit card data will be recorded with a credit reference agency, there is no process of informing agencies as to whether a lending application has been successful.
- Determine your credit score for lenders. Each agency will give you a credit score based on the information they have about you. However, these are all different and are not used by credit providers to make lending decisions.
- What causes someone to have a bad credit rating?
- What’s the difference between a soft and hard credit search?
- How to improve a bad credit score