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Credit reference agencies – are they confusing consumers?

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The financial regulator, the Financial Conduct Authority, says it’s concerned that consumers are being confused by credit reference agencies. It is going to take a closer look at exactly how this industry works.

Credit reference agencies explained

If you’ve ever taken out a loan, a credit card or signed up for something like a pay monthly mobile phone contract, the lender will have checked your credit file. Three major credit reference agencies collect this information. You have the legal right to access your credit report (which is a snapshot of your file) free of charge from each of the credit reference agencies.

SAVVY TIP: There are three major credit reference agencies: Equifax, Experian and TransUnion and around 20 smaller, newer companies. Around half of lenders provide information to two, if not all three, of the big credit reference agencies. But it’s not something you’d be able to find out easily unless you’d been turned down for credit.

What’s on your credit report?

Your credit report is a mixture of publicly available information, such as whether or not you’re on the electoral register, and private information, such as whether you made your credit or loan repayments on time.

You can read more in my article called What’s on your credit report.

What’s the problem?

Many people never see a copy of their credit report. Research by Which? in 2016 found that over half of people had never seen their credit report. If you’ve not seen yours, that means you don’t know what information lenders are relying when deciding whether or not to give you a loan or credit card.

And, although the industry says that mistakes are rare, you won’t know whether or not there’s a mistake. Lenders could be relying on inaccurate information when deciding whether or not to give you credit.

SAVVY TIP: You have the right to get mistakes corrected. There’s a link at the bottom of page to an article on how to correct a mistake on your credit file.

Another problem is that the credit rating system works on a ‘guilty until proven innocent’ model. This means that if you don’t have credit, maybe because you prefer not to have a credit card, and rely on your debit card instead, you’ll probably find it harder to get credit.

What the Financial Conduct Authority is doing

The FCA is concerned enough to take a closer look at information that credit reference agencies compile and hold. It says it’s concerned about several areas:

  • Quality and consistency of information: The FCA says it’s previously identified potential problems with things like consistency of credit information. If information isn’t accurate, for example, someone could be turned down for a loan or credit when they needn’t be, or offered credit at a much higher interest rate.
  • The level of competition between the credit reference agencies: It’s the lenders that choose which credit reference agency/ies they will supply with data. But the FCA is concerned that there’s not much switching between providers (sound familiar?!).
  • Lack of awareness of how information is used. People aren’t very aware of how credit reference agencies use their financial information. As I mentioned earlier, Which? found that 53% of people have never checked their credit report and 36% incorrectly thought that checking their credit score regularly would damage their credit rating.
  • People with little or no credit history may be unfairly penalised. Research by Experian suggests that 5.8 million consumers have limited or no credit history. This could restrict their ability to access numerous services. The FCA wants to look at how much harm this may be causing some consumers.

What does the FCA want to know?

The FCA is keen to get answers to some specific questions in this study. It wants to find out:

  • How accurate is the information that credit reference agencies provide?
  • How do consumers use credit information services?
  • How well do consumers understand credit files and credit scores?

SAVVY TIP: You can read more about exactly what the FCA is looking into in this document on its website.

The FCA will publish its early findings in the spring of 2020.

Related articles:

How to correct a mistake on your credit report

10 things you need to know about your credit rating

Does your partner’s bad credit rating affect yours?

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