It is a sobering thought. Somewhere, there is a file containing information on almost every financial move we make. It may include financial information about our parents, children, spouse, flatmates, neighbours or a complete stranger. It is our credit-rating file.
When I dipped a toe in the water with this issue on the Interactive Investor website, I was inundated with stories and questions. Of the 35 per cent of people who had already seen their credit reference file, some found inaccurate and bizarre information about themselves. Others discovered things they would rather not know about their family's finances.
But by far the most comments were on the power wielded by lenders and the apparently illogical judgements they make. Many users said their file had no apparent black marks but they were still refused credit.
One user, Joanne, presents a theory on this. She says: “I have a feeling that credit card companies are refusing people because they will not make enough money out of them. With so many low interest deals and so many people applying, they are in a position to pick and choose.
“If your credit history indicates that you are using them for a short-term low-interest loan, then they might not be interested.”
It seems this aspect of the industry is due for an overhaul. But the confidentiality aspects of credit scoring allow some lenders to push their commercial interests to the limit.
The UK's two credit reference agencies, Equifax and Experian, collect literally millions of records every month. They are sent information from financial institutions, shops and commercial businesses which are licensed to offer consumer credit and process more than 2,000 credit checks every day. As the agencies do not make the judgements on credit-worthiness or keep blacklists, the information they provide to lenders is effectively a guide to how likely borrowers are to default on debt.
It is then down to the lenders to decide whether to offer credit. When you consider that there are currently over 100 million credit, debit, charge and store cards sloshing around the UK, it makes sense to have some kind of central point of information so lenders can make responsible judgements. Sensible customers do not want to subsidise the defaults of others.
But Experian is fed up with unsuccessful credit applicants being told its files are the problem when, more often, the real reason is their genuinely poor credit history or the lender's judgement. It is pushing for wider use of the Guide to Credit Scoring which came into force in March but which has so far not been applied whole-heartedly. The guidelines require a lender to explain why it has declined an application but only if the applicant asks.
It is time that everyone took a regular look at their own credit-reference file. This typically contains information on past and present add-resses, electoral roll details, any applications for credit plus details of arrears, defaults, county court judgments and bankruptcy. It may also include similar information about a spouse, parents and any adult children or flatmates.
Lenders claim this often indicates how much financial pressure you are under or when children are likely to learn bad credit habits from parents. This shocks many people who apply for their file.
It is time we took a stand on the fact that some lenders still place such high importance on the credit histories of our relatives. Interactive Investor user Sam was refused a loan and later told that the source of his poor credit history was his mother's financial position. He says: “I have not lived with her for 12 years. I requested a disassociation from her and, when I eventually received my credit rating, there was no history of bad credit at all. The whole episode was unnecessary and quite stressful. I was left feeling very bitter about this. If there was to be more exposure of this subject, then I am sure that the current practices would be changed.”
Another site user, Yanxman, says: “I got a copy of mine after being refused a credit card. I was shocked and embarrassed to also get information on my mother's and my deceased sister's financial status. Nothing in it, though, to explain why I was not eligible for a credit card.”
Research reveals that 23 per cent 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 eight million people (one in five) are blacklisted and cannot use plastic or take up any kind of credit agreements. Many of these are turning to loan sharks and facing interest charges of up to 300 per cent.
It is thought this has come about as a result of automated credit-scoring techniques used by lenders.
To get a copy of your credit files, send a cheque or postal order for £2 to the following credit-reference agencies, including your full name and details of your addresses over the last six years plus moving dates. Sign and date the application.
l Equifax, PO Box 3001, Glasgow, G81 2DT (tel: 08705 783783 or email: www.equifax.co.uk).
l Experian, PO Box 8000,Nottingham, NG18 5GX (tel: 0115 976 8747 or email www. experian.co.uk).