Personal Finance: Are you a bad risk?

Each year, tens of thousands of people's applications for loans, mortgages, credit cards or hire-purchase are rejected, following a credit rating request by the service supplier.

In many cases, the decision to turn down a request appears incomprehensible: the individual concerned may well have a perfect debt repayment record. Or they may already own several credit cards, none of which are up to their spending limit and on which balances are faithfully paid in full every month.

How does credit rating work? There are two main credit reference agencies in the UK which carry out this activity: Nottingham-based Experian, and Equifax, in Glasgow. Between them, they carry details on 44 million people in the UK.

Their data banks include details about your family, credit cards, mortgages, wages, bank accounts and information on any unpaid bills, failure to pay hire-purchase debts or County Court judgements (known as CCJs) against you - although they will not appear if paid off within one month. If paid off later, the file can be marked "satisfied" but the information will be on file for six years.

Credit reference agencies will also look at the electoral roll for your address to see how long you have lived there, plus the financial details of every adult with the same surname at that address. Previous inhabitants at the same address will also be in the file, plus their details.

Other available information, supplied by organisations with whom you have financial dealings, details how you handle the credit accounts you already have. It is updated monthly to show whether you keep payments up to date. There will also be a record of inquiries made on your name over the past two years, not all of these for lending purposes.

Somewhat bizarrely, the presence of multiple inquiries, or "footprints" against your name - irrespective of whether a loan or a card application was actually proceeded with - can sometimes be taken to indicate that the individual concerned is a potential "bad risk".

Given the multiplicity of these sources of information, it would be rare if a mistake were not made. Equifax, however, claims that. out of the 650,000 requests it receives annually from people who wish to see their files, out of 65 million reference requests each year, fewer than one per cent find any inaccuracies.

Be that as it may, inaccurate details - or, better put, details that are no longer accurate - are a major reason why people can be refused credit. So how can you make sure that the information kept on your file is accurate?

Everyone has statutory rights in this regard. These rights were formerly enforced by the Office of Fair Trading (OFT), but a change in law means that responsibility is passing to the Data Protection Registrar.

When the Data Protection Act is fully in force in October 2001, individuals will have the right to see all information about themselves, whether it is on computer or not, and to have incorrect records amended.

But under the 1974 Consumer Credit Act, it is already possible to ensure that credit-linked information is accurate. Anyone refused credit for pounds 25,000 or less may write within 28 days to whoever has refused, asking the reason why and the name of any credit reference agency consulted.

While it is not mandatory to give a reason for a credit refusal, the name and address of any agency used must be supplied within seven working days. Section 158 of the Act says you can ask the named agency for a copy of your file. The agency must send a copy of the information or tell you if it has no file.

Both Equifax and Experian will supply you with all details on your file, as long as you send them a cheque or standing order for pounds 2, a fee determined by the OFT, plus your full name and current address. If you have lived there for less than six years, you should include all your addresses over that period.

Among the commonest problems encountered by people who check their files is one where two people with the same surname, but with different credit records, for example a father and a son, live at the same address.

Also, lenders assume that everyone living in a household, or even people who have lived there in the past, are financially connected or dependent. If you can show that your finances are not connected to the other person or people in question, then you can ask for a "Notice of Disassociation" to be placed on your file.

You will need to give the full names and addresses of those involved, and the nature of the relationship you have with the people you want to be disassociated from.

If the information is simply wrong it should be removed from the file. In other cases, you are allowed to provide a 200-word statement, called a "Notice of Correction", which will be added to your file. For example, if you had a CCJ issued against you when you were unemployed then you could explain this in the notice.

Reference agencies must send copies of corrections to anyone who has asked for information about you during the past six months. They must also use the corrections in future.

If credit denials have become endemic, it is better to make sure that the mistake's originator corrects it with the agency concerned and then sends you written confirmation of that correction. If you make the correction yourself, you will need to offer proof that an error has been made in your file before it is changed.

If you have had a CCJ issued against you, after the bill has been paid, it is possible to obtain a "Certificate of Satisfaction", which lets institutions know the bill has been paid, although the judgment remains on the credit file for six years afterwards. Should the CCJ have been put on your file erroneously, then you must go back to the firm that originally brought the CCJ and ask them for a "Certificate of Cancellation".

When this is done, the Certificate goes back through the Registry Trust, part of the Lord Chancellor's department, and is sent to the credit reference agencies who will then remove it from their files.

A CCJ can also be removed via a Certificate of Cancellation (or Proof of Payment, in Scotland) if the debt is paid within one month. There are a number of firms which promise to ensure "cancellation" of CCJs from files, for payments of between pounds 50 and pounds 100. In nearly all cases, this is a waste of money for something which you can do quite easily yourself.

Even if you succeeed in correcting any errors and omissions in your files, and disassociate yourself from others with a bad credit history, this does not automatically mean you will obtain credit.

This is because while all lenders will use information supplied to them by reference agencies, they each make their own individual assessment as to whether to grant credit. One lender's willingness to offer a pounds 5,000 limit on a card can sometimes be matched by another issuer's unwillingness even to offer one.

Before deciding whether or not to give you a loan, most companies will put your financial details through their own credit "league table". People who own (or are buying) their own home score higher than those in rented accommodation. And having lived at the same address for years is much better for your credit rating than is having moved around.

Being married, having a credit card and having held the same job for several years are also likely to earn you high points. Age is also important. Generally, the older you are, the more the lender likes it.

USEFUL ADDRESSES AND TELEPHONE NUMBERS:

If you would like to obtain copies of your personal credit file, write to:

Experian, Consumer Help Service, PO Box 8000, Nottingham NG1 5GX. Alternatively, a recorded message on 0115-976 8747 will explain how to obtain a copy of a credit file from Experian. Its consumer help department is on 0115- 958 1111.

Equifax, Department 1E, PO Box 3001, Glasgow G81 2DT. Its consumer helpline number is 0990 143700.

The OFT publishes a free booklet, No Credit? (call 0870-606 0321 or write to OFT at PO Box 366, Hayes UB3 1XB for details).

The Data Protection Registrar information line: 01625 545745.

Consumer Credit Counselling: 0800-138 1111

National Debtline: 0121-359 8501