Shining a Light into the Black Box of Credit Reference Agencies
By Charlie GordonSep 8th 2017
Back in the day (as recently as 30 years ago) how would a lender know whether to give someone money or not? From the borrower’s point of view, how could you prove you were a safe bet? Decisions used to be made face-to-face over lots of paperwork and still on limited insight. Then enterprising people saw a gap in the market – what if someone were to gather up and keep records of people’s borrowing histories in one place? The Credit Reference Agency (CRA) was born. The three UK CRAs are TransUnion, Equifax and Experian. They are independent organisations that play no part in the decision-making process of whether to lend or not; they just provide the objective facts about everyone’s credit history.
Credit file data
So, what information do they store? Some publicly available stuff – e.g. is person X on the electoral register, do they have judgments or bankruptcies on record? Also, a host of financial history data – does person X have a credit card, do they have outstanding mobile phone bills, how much debt do they have? Lenders find all of this information extremely interesting when making decisions and pay the CRAs for access to it, along with the CRA-generated overall risk score given to every customer - the Credit Score.
But what about the customer? How many people in the UK have checked what information is being stored on them by the CRAs? Information that is used in important decisions like whether to grant a mortgage? Around 50-55% of people is the answer. This is the black box. In the past, customers would have to pay one of the CRAs to get sight of their Credit Report and Credit Score, just like the lenders were doing. Confusingly, each CRA has a different set of information too, so a customer would have to pay all three CRAs independently to get the full view. No wonder the majority of people never bother to do this and remain in the dark as to why they are getting declined for credit.
There is some light being shed though. In recent years there has been a move to empower customers and make all of this more transparent. At the core of this movement is a quantum shift in how we view rights of data ownership. Customers are recognising that they have the right to know what information is held on them and how it is used. In recognition of this, free Credit Report services such as ours have been launched, giving customers access to their personal information for no cost. Advice on how to take control of your Credit Report is proliferating – did you know you can write notes on your Credit Report for lenders to see? These are called Notices of Correction and can be used to explain that you didn’t pay a gas bill in 1999 because you made an honest mistake when you moved house (and come on, it was only for £10).
Better credit records
In the next few years, most customers will be actively managing their credit histories with the CRAs – cleaning up errors on their reports and improving their Credit Scores. This, coupled with lenders having access to better information to make decisions on, will see a rise in customers getting matched and accepted for the right credit products for them.