Credit reports: The facts

Big brother may not be watching you but credit card companies certainly are. Somewhere, there is at least one file with notes on the financial moves you make. It may even contain financial information about your parents, children, spouse, flatmates, neighbours or a complete stranger. It is your credit rating file.

Organisations which lend money through credit want to know whether you are a good risk. So, whenever you apply for any kind of credit, the paperwork you fill out will state that the credit card issuer or loan company will contact a credit reference agency to check your rating and notify them that you have applied for new credit. By signing the form, you give your permission for them to access your credit rating files. These are held by Britain's three credit reference agencies called Equifax, Experian and Callcredit. They collect literally millions of records about us and our finances every month. They are sent information from financial institutions such as banks and credit card issuers. They will also get data from shops and commercial businesses which are licensed to offer consumer credit on anything from mobile phone deals and store cards to 'buy now-pay later' offers. The credit reference agencies do not make any judgements themselves about your credit-worthiness. They just collect and issue information to and from credit issuers and lenders.

When you consider that there are currently more than 100 million credit, debit, charge and storecards sloshing around Britain, it makes sense to have some kind of central point of information so that lenders can make responsible judgements.

What is in your file?

This will typically contain your current address and all previous addresses and confirmation that your name and current address appear on the electoral roll. There will also be a record of all your past and present applications for loans and credit (and whether or not they were successful), information about arrears, defaults, county court judgements and bankruptcy.

Your credit rating file may also include similar information about your spouse and possibly your parents and any adult children or flatmates. Lenders claim that this often indicates how much financial pressure you are under or that children will learn bad credit habits from parents. It is this element of the credit report which many people find annoying and shocking but it is possible to have the data removed if you think it is damaging to your credit prospects.

Why it's important to see what is on your file

The information in your credit rating file is not just extremely personal, it has an important impact on your financial life and your ability to get credit. So it is essential that you get hold of a copy of each file to ensure the information held about you is accurate and to help you understand why you may have a poor credit rating. One million people per year apply to see their files. And because some lenders only use one credit reference agency or supply varying levels of detail, it is important to get your credit file from all agencies to make sure that you are not being hampered by the black marks destined for someone else, possibly with a similar name. Or penalised for applications or defaults which have never occurred.

Research reveals 23% of people aged between 18 and 65 would have credit applications rejected by UK banks and building societies. A so called 'credit underclass' of more than 8 million people in Britain (1 in 5) are blacklisted and cannot use plastic or take up any kind of credit agreements. It is thought that this has come about as a result of automated credit scoring techniques used by lenders and many of these are turning to loan sharks and facing interest charges of up to 300%.

What are lenders looking for?

It is one of the great mysteries in life. What makes one credit card company refuse you and another accept you? Of course the lenders are not keen to share their credit scoring criteria with the public but rating techniques can vary enormously between one lender and another. Once they get your information from the credit reference agencies, some look for one or two pieces of basic information. For instance, if you are not on the electoral roll, then the credit company will believe there is a chance that your address is not permanent, or - worse still - fake. This means that the company has no way of finding you if you are late with payments or run up your credit limit and disappear. After all, who wants to lend money to someone they may not be able to find? Even a high salary is no guarantee of getting credit - earning a six-figure sum is unlikely to make a difference if you are not on the electoral roll. Getting copies of your files will enable you to spot crucial gaps like this and rectify them.

Switching balances and cards every few months has become common practice in the UK and some lenders may take a dim view of so-called 'rate tarts'. But sometimes, you cannot win either way. Too little or non-existent credit can be just as much of a problem for lenders looking for customers who will run up large debts. Generally, unless you have any obvious financial horrors such as bankruptcy, you should be half way there if you appear on the electoral roll.

How to get your hands on the information

To get copies of your two credit files, log on to the credit reference agency websites for further information. The minimum fee is £2.00 but there are various online packages allowing you ongoing access to your file over longer periods which will help you to keep a closer eye on your rating. If you do not have a credit card and are unable to pay for an online service then you can apply for your file by post. Experian and Equifax offer sample credit reports online and services which will help you understand how your rating compares to other UK borrowers.

Experian has teamed up with Yahoo! to provide easy access to your credit report, score and more. Visit our Credit Reports centre.

Equifax: www.equifax.co.uk

Experian: www.experian.com

Call Credit: www.callcredit.co.uk