Credit Searches - Treasury Contents

2  Credit referencing

The role of credit reference agencies

7. Lending institutions use the information held by the credit reference agencies (CRAs) to assess whether they should lend money to consumers, and in some cases, at what price credit should be offered. Experian defines the role of a credit reference agency as follows:

A credit reference agency collects, matches, derives, merges, and supplies data to organisations to help them make decisions about whether to give, or continue to give credit to individuals and/or businesses. They create and hold databases of people and/or businesses operating within the country in which they operate so, for example, the CRA operated by Experian in the UK will only hold data on people and businesses with addresses in the UK.[10]

Experian notes that "Experian does develop and provide credit scores but most lenders will use their own, although they use Experian scores as part of their decision process".[11] CRAs do not set lending policies within lending institutions or set the level of risk a lending institution may be prepared to accept.[12]

8. The information held by CRAs will be a mixture of public and private information. Public information could include whether consumers are listed on the electoral register, and whether they have any bankruptcy proceedings against them. Private data will include details of any credit agreements a consumer has signed up to.[13]

9. The lending institutions were keen to point out that if they were to ensure that lending is conducted in a responsible way, it was important that lenders were able to make proper assessments of those seeking credit. Searches of information of credit reference agencies played an important part in that assessment process.[14]

Pricing for risk

10. Some credit products, such as personal loans, may have an advertised interest rate, so that all consumers accepted for such a product will only receive that interest rate. Some credit products though are 'priced for risk'. For these 'priced for risk' products, while a consumer with a weaker credit history (in the eyes of the lender) can still be accepted for credit, they may receive a higher APR (interest rate) than that advertised. However, under the Consumer Credit (Advertisements) Regulations 2004 the APR (or lower) that was advertised should be obtained by at least 66% of those people for whom the credit was provided.[15]

Different types of credit searches

11. The increasing use of 'priced for risk' products meant that a different form of credit search was created. The two main types of credit search are as follows:

  • An application search is made when a consumer wants to apply to receive credit. Consumers' credit reference files are marked when such searches are made, and such searches are visible to other lenders looking at the file.[16]
  • Quotation searches were originally developed to provide a quotation of the price a consumer may pay for a 'priced for risk' mortgage.[17] Quotation searches provide the lender with all the information it needs to price the product for the consumer, but no mark is visible on the file for other lenders to see that the search has been undertaken.[18] This allows consumers to compare prices without multiple searches appearing to other lenders. Quotation searches only provide information on price, rather than whether a consumer will be accepted for a particular product. That means they are only useful for products that are 'priced for risk', as in other cases the advertised price is the only price available to accepted customers.[19] Quotation searches do not mean that a member of the public will be accepted for the product at the price quoted.[20]

10   Ev 25 Back

11   Ev 27 Back

12   Ev 25 Back

13   Ev 25 Back

14   Ev 26 Back

15   Q 174; The Consumer Credit (Advertisements) Regulations 2004 ((SI 2004/1484) Back

16   Ev 61 Back

17   Ev 61 Back

18   Ev 61  Back

19   Ev 27  Back

20   Q 88 Back

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Prepared 22 December 2009