How credit score agencies have the power to make or break lives

Omar Nasser came close to losing his home when his interest-only mortgage expired earlier this year and his application for a new loan was turned down because he failed a credit check. When he investigated, he discovered that his bank, Lloyds, had registered a defaulted payment on his credit record and, as a result, his credit score – which lenders use to assess a customer’s credit worthiness – had plummeted. The default, he says, was due to a banking error because Lloyds had failed to process his request to cancel a direct debit, plunging his account into the red.

“When I complained, Lloyds promised to remove the default,” he says. “But although it was removed by the credit reference firms Experian and CallCredit, it was not removed by Equifax.”

Lloyds says it had no record of a request to cancel the direct debit, and explains that it can take 60 days for credit records to be updated. The default has now been removed.

Many people, like Nasser, are only dimly aware of credit reference agencies – multimillion-pound companies which lurk in the background of our lives but which have the power to make or break our financial decisions. They receive, store and rate information about the financial history of every adult spender in the UK – their loans, credit card debts, county court judgments and mobile phone contracts. Financial services firms pay to access this information and use it to decide whether a customer is likely to pay their debts. Often consumers only discover this when they are turned down for a loan.

Hannah Garrity, for example, was unable to secure a mortgage and was stunned, she says, “to discover this was due to a £10 default recorded by EE in 2011. I’d never had an account with EE”.

EE was unable to investigate without an EE mobile number, which she didn’t have because she had never been a customer. Experian, the credit reference agency used by the company, was powerless to remove the default without permission from EE. Only after multiple calls from Garrity did EE discover she had fallen victim to identity fraud and removed the default. “Once the inquiry was raised with our fraud department the account was investigated and written off and the credit report updated within 24 hours,” says EE.

The failure of a lender or credit reference firm to record an address correctly or update details from the electoral roll can scupper a customer’s chances of taking out a mobile phone contract or buying a house. One Guardian reader was refused credit because a credit reference agency deemed his complicated Dutch surname invalid. Another found that his records had been erroneously linked to an insolvent stranger.

The three main agencies – Experian, Equifax and CallCredit – perform a vital function in a world that lives on credit. But the consumer has frighteningly little control over what happens to their personal details. Lenders have to advise customers that their spending history will be passed to an agency, but there is no chance for them to opt out. Nor do they have the power to correct a mistake. Only the company which submitted the information can amend it, otherwise it remains on record for six years. All a customer can do is attach a notice of correction explaining why they contest it.

When an error is acknowledged it can take up to 28 days to be corrected, and there is a charge of £2 to view your own data. Since firms are not legally obliged to issue a customer with a default notice before applying a black mark, many people remain unaware there’s a problem. Moreover, lenders can subscribe to one, or all, of three reference agencies, which don’t share data except in cases of fraud. So anyone wanting to check their credit score would have to pay all three.

For the privately run reference agencies it is a lucrative business. Last year, Equifax and Experian turned over $3bn and $4.55bn respectively, some of it from the monthly £14.99 fee they charge customers for receiving regular updates on their credit file and some from selling software to help lenders rate customers’ creditworthiness.

For the customer, however, the system can ruin their finances. Since a default remains on a credit file for six years, a £1 debt can tarnish a personal record for longer than a criminal offence.

Andrew John (not his real name) is unable to get a career development loan to help him complete a master’s degree because of a failed direct debit payment in 2011. “Nationwide charged me £15 for defaulting, which took me into an unauthorised overdraft,” says John, who was suffering from mental illness at the time.

“Within two months I accrued £283 in penalty fees and the debt was recorded on my credit file. I complained and Nationwide cancelled the fees and even paid £125 in goodwill. What I did not realise is that it did not remove the default which still has six months to run.”

In 2014 banks were banned from filing defaults if a debt entirely comprises bank charges, but Nationwide refused to delete John’s notice because his debt predated the rules. Only after The Observer got involved did it agree to clear his name.

Nationwide says it had tried in vain to contact John to discuss the debt in 2011 and that it was unaware of his health issues. “Given that we no longer apply defaults where debt comprises solely of charges, and taking into account the specific circumstances, we will arrange for the default to be removed early to reflect our changed policy,” it says.

Under the Data Protection Act, customers do not necessarily have to give their consent for personal information to be shared, provided the reason for the sharing is fair. The Information Commissioner’s Office, which regulates credit reference agencies along with the Financial Conduct Authority, admits consumers are powerless.

“Individuals do not really have a genuine choice as to whether their data is shared, as saying ‘no’ will effectively stop them getting the loan,” it says. “It is unlikely that most people would consent to this sharing if they did have the choice, especially those with a poor credit history. The argument, which we generally accept, is that it is in the interests of businesses to be able to assess the chances that they will get back any money they lend. It is also ultimately in the interests of individuals, as it actually makes it easier to obtain credit overall, and also ensures that lenders do not lend money to people who can’t afford it.”

Experian says that accuracy is its priority. “We carry out hundreds of checks on the data lenders share before it is added to people’s reports to try to spot obvious errors. It’s also important everyone checks their own reports at least once a year to help spot and rectify any anomalies before they potentially become a problem. “We mark any disputed entry as ‘unreliable’ while we investigate with the provider and such disputes as resolved on average within 14 days.”

Equifax points out that its customer service line is open 12 hours a day “to help individuals understand the information in their report and, if necessary, help correct any errors simply and quickly”.

HOW TO HAVE A CLEAN SLATE

■ Lenders mistrust a blank slate, so if you’ve never owned a credit card or taken out a loan or credit contract you could be disadvantaged. Similarly, you will depress your score if you apply for credit too often, even if you’re just shopping around, because each search performed on your credit history shows on your file – a multitude could make you look desperate.

■ Try not to exceed 30% of your credit limit because credit scoring software will trigger an alert if you look as though you are “maxing out”. If you have several credit cards, beware closing the accounts and putting your balance on to one card because that would push you closer to your credit limit.Set up a direct debit to pay off credit card bills each month so that you don’t miss one and skew your rating.

■Make sure you’re on the electoral roll and be aware that lenders are spooked by frequent changes of addresses.

■ Having a partner’s rating linked to yours through a joint account or loan could affect you if they have a poor record.

■ If you have an unresolved complaint about a credit record you can refer it to the Financial Services Ombudsman and report any concerns about a credit reference agency to the Information Commissioner’s Office.