4 Multiple credit searches |
18. Whether applications for credit will be successful
is determined by the processes within each lending institution,
using the information available from consumers' credit reference
files in financial institutions' own internal credit scoring systems.
To find out :
- whether they will be accepted
for credit, and, if so;
- at what price that credit will be offered;
consumers have to make a full application for credit
to each different lending institution. Before we began this inquiry,
there was the suggestion that multiple applications might impact
on some consumers' credit ratings, and thus the price and potential
availability of lending from other lending institutions. It was
alleged that multiple credit application searches were seen as
a sign that a potential borrower was 'high risk'.
19. One of the main problems that worried Martin
Lewis was the impact of the information about multiple credit
application searches on customers trying to obtain 'priced for
risk' unsecured credit products, such as certain credit cards.
Mr Lewis forcefully expressed his concern for customers who:
have absolutely no idea that, when they apply for
an 8.9% loan, they may be given a rate of 30% interest and they
have no idea that the fact that they have been given a rate of
30% interest, rejected it and applied for another piece of credit
may well then stop them getting the next piece of credit.
20. His concern was that when customers shopping
around for a loan, using full application searches to do so, rejected
offers because they were at different rates to those that they
applied for, they were building up application searches on their
records, and thus finding credit increasingly hard to get. Mr
Van der Meer considered consumers affected were those who did
not know of the impact of multiple credit application searches
until it was too late and then found difficulties in accessing
credit. The industry
though denied that there was such a strong impact in interest
rate changes to consumers.
We explore below the impact multiple credit application searches
actually have on consumers. However, it is important to note
that there are alternative approaches available.
OTHER COUNTRIES' SYSTEMS
21. Mr Van der Meer raised the possibility of mirroring
the German system which he outlined as follows:
In Germany, they have a credit bureau, the SCHUFA,
and they run two types of quotations, a hard search equivalent
to full credit score and a quotation search which is the equivalent
of the UK one maybe with some slight local nuances. The quotation
search can be run and is left on the footprint of the customer
and the banks can see that for ten days, therefore, allowing them
to take on any fraud issues related to multiple applications,
and it is available to the consumer, I believe, for a year and
possibly more than that, and a full credit search would stay on
the record for both the banks and consumers for three years.
He suggested that nothing prevented the adoption
of such a system here in the UK.
Experian suggested that there may be a cost from implementing
the German system here in the UK:
Application searches are recorded when a consumer
decides which potential offer to apply for but they can still
be refused. Application searches are still used in scoring for
up to one year but, the German credit bureau advises that whilst
still predictive they are now less so than they were before this
system was put in place. As a result, more consumers who should
not be getting access to credit are almost certainly doing so.
And Ms Dews from the OFT shared her "fear"
that interest rates for consumers may rise if CRAs were no longer
able to store information on credit searches.
22. In the United States consumers have a credit
score, which they can then use to assess whether particular products
are likely to be available to them. Mr Lewis outlined the benefits
in the States you get the actual number of how good
your credit score is and what the advertisers do is they say,
"If you've got a credit rating of over 900, you can get this
product" and, therefore, you apply.
However, such a system would be a significant departure
from that currently in operation in the UK. Mr Lewis described
the implementation of the US system as a "massive, radical
overhaul" and reiterated his belief that the present problem
could be sorted by "with iterative change just by making
the quotation search work".
Ms Hoyle was cautionary as to the potential impact of the implementation
of a US system. She warned:
you were saying earlier about a standard credit scoring
method, maybe as they have used in the US that sounds very much
like a very 'vanilla', fairly restricted approach, and that may
have the potential for excluding some people from the market who
currently benefit from credit products.
recommend that in considering the impact of multiple credit searches,
and credit searches more generally, the OFT assesses whether there
are lessons to be learnt for how the UK system operates from other
How important is search data?
AS A SIGNAL OF ABILITY TO PAY
24. Given that there was a complaint that consumer
detriment was occurring, we attempted to find out how important
being able to see the number of credit application searches a
consumer has made is to lending institutions, and see whether
a correct balance was being struck. The lenders were adamant that
application search data were important. The Finance and Leasing
Association warned that if lenders were no longer able to refer
to such data:
it would severely undermine the quality of credit
decisions. It would also result in a rise in problem debts from
customers with multiple searches and it is in no-one's interest
to provide credit where it cannot be repaid.
Lenders were keen to keep their access to search
data for application searches because they believed that it could
be a significant indicator of whether or not consumers would be
able to pay their debts in the future. However, the industry was
at pains to point out that multiple credit application searches
alone would not be enough to make a difference to the outcome
of a credit application, as they were used as part of a range
of information, and formed only part of the system used to assess
Experian explained that:
credit searches alone are unlikely to have a significant
impact. However, if an applicant is already borrowing a significant
amount and displays other characteristics analytically proven
to be high risk then they will almost certainly lose points for
each and the number of searches may tip them into being refused
25. It appears to be only certain customers who are
most at risk of an impact from frequent and recent credit application
searches. The Council of Mortgage Lenders termed these 'borderline'
cases. To highlight
who was affected the most by multiple application searches on
their credit reference files, Equifax identified three different
types of consumer:
- POOR FILEconsumers who
at the time of application had defaulted on previous credit or
currently had serious arrears on one or more accounts.
- THIN FILEconsumers who at the time of
application had either no open credit accounts or only one or
two accounts opened in the last few months.
- GOOD FILEconsumers with open credit accounts
at the time of applications and with a generally positive repayment
Equifax then stated that those in the 'Thin File'
group were "penalised the most heavily at all levels of search
from Experian highlighted "an individual who might have a
weaker credit score would be one who has a mortgage of £200k,
plus unsecured a combination of unsecured and hard core credit
card debt of £18k, accrued in the recent past and a declared
income of £25k", whose score result would be based on
these factors, but then "exacerbated" by credit card
told us that credit applications are one of 400 potential characteristics,
and that application search data is "proven to be linked
to consumers who are less able to repay credit; often they tend
to be the ones that are looking for extra credit because they
are already overcommitted".
26. Ms Dews noted that there was a balance to be
struck between "good information being available to lenders
and information which is relevant to the pricing of risk, but
we do also believe very strongly, in the Office, that people should
be able to shop around to get the best quote they can without
that having an impact on their credit rating".
She concluded that the OFT were keen to find that balance.
27. We were keen to assess the number of people potentially
affected by multiple application credit searches. Mr Lewis pointed
out that such information was unavailable to the consumer side
its part, the industry suggested that this was not a significant
problem. The Council of Mortgage Lenders explained that "it
has been put to us by one major lender that this is likely only
to affect around 1% of mortgage applicants, if that".
Ms Key-Vice explained that:
We have run some statistics about the proportion
of consumers that have more than five credit searches within the
critical period which is three months and, according to our statistics,
only 7% of consumers have that number of credit searches and,
of those, a small proportion would be impacted because, as we
explained in our evidence, this is about the cumulative impact
together with other risk information.
28. As we noted earlier, one of the principles which
the Information Commissioner's Office highlighted was that information
"must not be kept for longer than necessary".
However, search information becomes less useful over time. Mr
Leenders told us:
there is an iterative, cumulative effect for application
searches, and I think the number referred to typically across
the submissions that were made in writing was around about five
in around about three months. Those searches are held on file,
I think, for 12 months and of course the value of that data in
determining risk and propensity to repay rather dilutes over time,
so the value of that data after the initial three months, for
example, after six months becomes a less significant issue on
the score card, and actually in some score cards now they are
not used at all.
note that application credit searches become less useful both
for detecting fraud and as part of a credit scoring system, the
older the search data is. We recommend that the ICO look at whether
the 12 month period for storing search data is appropriate, given
the principle that information "must not be kept longer than
30. The banking crisis and the ensuing recession
have of course impacted on the credit market. Credit availability
has been diminished. Martin Lewis, of Moneysavingexpert.com, felt
that consumers who had previously been excellent credit risks
were now deemed to be good credit risks, while those deemed previously
to be good credit risks were now getting products previously offered
to applicants with poor credit scores.
As Mr Van der Meer, from Moneysupermarket.com, explained, this
has had an impact on consumers, in that "accept rates in
the [lending] industry have moved from around 50% to closer to
30%, so the ability of these consumers to easily find the products
that are available to them and at the rates that are available
to them is declining".
As such, people are now probably having to shop around for credit,
both on price and to see if they will be accepted for a loan.
31. There is also another potential driver for increased
shopping around, in the increasing use of the internet, especially
where consumers are searching for credit, which has a direct effect
and also may have increased awareness of the desirability of comparing
different prices more generally. Mr Van der Meer confirmed that
"more consumers [are] shopping around over the last few years,
so the use of comparison sites, like Martin's and ours, has obviously
increased, but just generally consumers shopping around, however
they do so, whether it is in a branch or online, is increasing
every year, so you have got more consumers who want to shop around".
32. The industry appears to have recognised that
both difficult market conditions and increased internet usage
will increase "shopping around", and appears to have
made some adjustment to the way it uses search data. Ms Hoyle
reported that "A couple of years ago, if you did have three
or four searches within a short period of time, then that would
feed into the credit score. But now customers are actively shopping
around (and even more so in the current market) and some lenders
are saying that actually seven or eight searches within a period
of time may not be unusual and so should not adversely affect
a credit score."
Mr Leenders told us that:
as the banking industry, we are rather moving away
from the inclusion of search data in credit scoring models rather
than including more search data in search models as more sophisticated
techniques come on line and one, for example, [
] was behavioural
data through personal current account performance
the impact on credit availability from the recession, and the
ease with which an application can be submitted via the internet
has meant an increase in full applications being made. The industry
seems to have responded by reducing their use in credit scores,
or lessening the weight given to them. We recommend that the ICO
examine whether there is a cut-off point beyond which the impact
of search data on consumers' risk profiles is so weak that storing
this data is unfair, since any benefit would be outweighed by
its detrimental impact on customers.
WHAT ARE CONSUMERS OFFERED?
34. What do consumers expect a quotation search to
tell them? In its evidence, Experian suggested that consumers
faced two questions when shopping around for credit, "How
much will it cost?" and "Can I have it?".
Experian went on to assert that "shopping around for credit
is not about whether a lender will provide the credit but is about
how much the credit would cost and whether it is the right product
for that consumer".
Using such a definition, Ms Hoyle told us that "Making
multiple credit applications has an effect, not shopping around".
35. We have already seen that quotes provided under
quotation searches do not assure the consumer of acceptance should
they then make a full application. When asked whether he felt
this was right, Mr Cates replied "I think you should be able
to see, actually, when you are going to get credit".
Consumers who have been quoted
a price for a product expect to get the product at that price
and not be refused on full application.
36. The problem
is that given there is no way to find out if the product is available
other than to make a full application, there is no practical distinction
between "multiple credit applications" and "shopping
around", whatever the industry view. We cannot see anything
wrong in consumers making multiple full credit applications to
see whether or not they can obtain credit from firms which may
have different, opaque, criteria for acceptance. We received evidence
that consumers seeking credit under the current system could find
that multiple application searches tipped the balance between
being offered credit and being refused, or affected the rate they
were offered. We are not convinced that consumers when 'shopping
around' distinguish between questions over price and availability
sequentially, but rather think of them together. At present, the
evidence is that repeated application attempts reduce some consumers'
ability to access credit, or affect its price. We recommend that
the OFT investigate the impact of multiple applications on the
availability and price of credit to consumers.
FRAUD AND OPEN COMMITMENTS
37. One of the main reasons cited by the credit reference
agencies and the lenders for their need to see search data was
to counter the risk of fraud, or ensure that consumers were not
offered too many lines of credit at the same time.
For example, Experian stated that consumers may make large numbers
of credit applications "if they are looking to commit fraud
and are testing the decision systems of lenders".
Experian also noted that "Applications that are successful
result in firm offers which can only be withdrawn if crucial information
changes. A consumer applying for and getting offers of 10 or even
20 or 30 credit cards could then activate them all. This could
lead to an explosion in credit, often to those least able to manage
it." By being
able to see the number of credit searches a consumer has made,
then the risk of either fraud or multiple open credit commitments
can be combated.
38. Mr Lewis appeared content for quotation searches
to be used to look for fraud. However, he was unsympathetic about
the use of searches in establishing whether people posed a credit
For fraud, most companies tend to use an agency like
National Hunter to do their fraud scoring; it is slightly separate
from the credit reference agencies. Now, I am certainly not arguing
that we bar quotation searches from being sent to National Hunter
so that they can weed out people for fraud based on quotation
searches. If someone applies for 100 cards in a week, you would
probably know it is ID fraud, but you could equally do that and
say that this cannot count towards someone's credit score.
The Committee is, of course, committed
to ensuring that fraud is minimised, and also to ensuring that
people are not offered too many potential credit commitments at
one time. However, as shopping around increases, the extent to
which multiple credit searches are good indicators of fraud or
over commitment may well be changing, and should be kept under
review by the OFT.
Does the system deter shopping
39. We are particularly concerned by suggestions
that the knowledge that multiple credit applications might affect
someone's credit score could itself affect the way in which the
market worked. Knowledgeable consumers are often considered the
bedrock of a functioning market, a position reaffirmed by Mr Cates
from the OFT, who stated that "active, informed consumers
really do drive the markets".
Mr Van de Meer highlighted a group of people who may be adversely
affected precisely because of their knowledge that there is some
impact from credit searches. He noted his concern for:
the people who do not apply because of unknown parts
of the system as the people who do apply multiple times and are,
therefore, downgraded in their credit score, so it is the uncertainty
around the system and the way it works that creates a fear of
shopping around which is as much of a problem as the actual number.
These fears, whether founded or not, are also present
in some of the consumer experiences outlined in Moneysavingexpert.com's
made statements such as "Had I not have feared having a footprint
left on my file I probably would have made at least three more
applications" or "I wanted a decent APR but was worried
about leaving credit search footprints".
Industry guidance may also have not helped in this regard. One
guide from financial industry associations which was sent to all
MPs to help them with constituency problems had the following
Be patient, not persistent
If you're refused credit for a product or service,
don't keep reapplying as this may lower your score. Wait a couple
of months before making further applications.
Ms Hoyle felt that this was reasonable advice, arguing
that "if I am turned down for credit [their advice is] to
pause, to have a period of timemaybe there is a volume
of searches; [
] for our members, eight or more over a short
period of time, which would be indicative of possible over-indebtedness
or of fraud". 
She felt that such advice was about consumers "taking a responsible
approach to managing [their] overall credit rating".
is clear evidence that some consumers do not shop around because
they fear that to do so will affect their credit score. Indeed,
industry advice suggests that multiple applications "may
lower your [credit] score". We consider there are likely
to be serious flaws in a market in which consumers are discouraged
from shopping around, either because of unfounded fears or because
of industry bias against multiple searches.
MANDATORY QUOTATION SEARCHES?
41. Mr Lewis thought that the problem of multiple
searches was "an easy one to solve, to be honest".
He suggested mandating quotation searches and that would prove
"a very simple solution to this particular problem".
During our inquiry it became apparent that the use of quotation
searches by lending institutions appears to have differed depending
on the market. In the mortgage market, about 80% of all searches
performed by mortgage suppliers on the Equifax database were quotation
concluded that "where quotation searches are required by
regulation (i.e. in the mortgage market) the process is working
well and ensures credit search applications are typically only
being performed when a formal application for a mortgage occurs".
Experian also noted this difference is the regulatory environment
on the use of quotation services: "The FSA included use of
quotation searches in their mortgage rules and the (then) DTI
recommended that all unsecured lenders that offer rate for risk
products follow suit".
Quotation searches appear not to have penetrated as far into
the unsecured lending market since quotation searches have accounted
for only some 2% of searches in the overall market (secured and
unsecured) since the end of 2007.
Mr Martin explained that this may be due to the mix of products
in the unsecured lending market. Since it may be that more unsecured
lending products were not rated for risk, there would be less
need for quotation searches.
Experian though suggested that from their client systems they
had identified a ratio of two quotation searches for each application
for both mortgages and personal loans.
42. Moves are already afoot to ensure the system
for quotation searches operates better in the future. In its evidence
to the Committee, the Office of Fair Trading stated that:
We are currently considering responses following
consultation on our draft Irresponsible Lending guidance. We have
decided to add a reference in that guidance explicitly covering
the need to allow quotation searches as well as application searches
where this is appropriate to the credit product. We will reinforce
this by amending our licensing forms to gather information from
lenders about the systems which they do or will have in place
in order to ensure their searches can where appropriate be recorded
as quotation searches.
searches have been widely used in the mortgage market. There may
be parts of the unsecured market where they should be used more
widely, in particular where the price of a product is weighted
for risk. We welcome the moves by the OFT to ensure its guidance
is explicit on the need to allow quotation searches where appropriate,
and recommend that it undertakes regular monitoring to ensure
the evidence we have received, it may be that the industry itself
is beginning to developing other systems to counter this problem.
Evidence from Confused.com highlighted a system it had developed,
that reduced the number of searches on consumer's credit reference
files. When using this tool for credit cards, the system has,
according to Confused.com, the following benefits:
- It significantly
reduces the number of applications a consumer makes for credit
cards that, from the outset, they have little or no chance of
- It ensures the customer is aware
which products are attainable for someone of their credit profile
(and so those who want to avoid rejected applications do not choose
a higher APR product in the mistaken belief that they may not
be eligible for more competitive products).
- Consumers who already hold credit
cards are able use their product recommendations to assess whether
they are overpaying on existing debt, potentially saving them
We welcome the development of tools
by the industry that may minimise the number of full searches
that have to be made by consumers, and urge all industry participants
to examine such systems, and see if good practice can be shared.
45. The credit search process is a daunting one,
especially for the uninformed. A potential solution is for greater
consumer education as to the process. Mr Van der Meer stated that
"education is a core part of the solution that we would advocate".
This opinion was shared by the British Bankers Association and
the Finance and Leasing Association in evidence they submitted
after our oral evidence session. They felt that our hearing had
"reiterated the need for better consumer education, so that
customers receive clear information about credit searches and
the role they play both in the application process and in influencing
a customer's credit profile".
Because of this, they had held initial discussion "with consumer
groups to explore the development of a Consumer Forum, which would
also look at how greater transparency can be achieved on how consumer
data is used in delivering responsible lending decisions".
the steps taken by the British Bankers Association and the Finance
and Leasing Association to explore how further transparency can
be achieved. We urge the credit reference agencies to ensure they
are part of this process, so that a well thought-out, comprehensive
approach can rapidly be achieved.
46. The use
of application search data in credit scoring has clearly been
sensible in the past as a means to detect fraud or demonstrate
potential inability to pay. However, it is not clear that this
remains the case now that shopping around has become more common,
and credit is harder to obtain, even for those who may be able
to repay it. There is a fine balance of public interest between
ensuring that fraud is prevented and consumers are protected from
reckless lending, and ensuring that the market is subject to the
disciplines of informed consumer choice. We have not been presented
with unequivocal evidence that application search data is essential
for loan providers, who have over 400 indicators that they may
Nor have we been given overwhelming evidence that it is a major
source of direct consumer detriment, although the number of consumers
making multiple application searches seems likely to rise. However,
we are extremely concerned about the effect of the use of credit
searches on market mechanisms, since, in principle, we believe
the ability to shop around is not only an important means for
consumers to assess the market, but also provides a key discipline
on providers. We have been presented with some solutions which
would reduce the adverse effects of the use of credit application
search data in credit reference files; we consider that any acceptable
solution must strike an appropriate balance between minimising
fraud and over borrowing and ensuring the market is subject to
normal disciplines. We recommend that the OFT look at this in
its assessment of the credit market.
47 Q 2 Back
Q 62 Back
Q 75 Back
Q 48 Back
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Ev 75 Back
Q 229 Back
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Q 24 Back
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Q 204 Back
Q 89 Back
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Q 45 Back
Q 200 Back
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Ev 46 Back
The Financial Fringe: A guide to personal finance: A practical
pack to use with constituents, March 2008, p 24 Back
Q 160 Back
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Q 40 Back
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Qq 86-87 Back
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