Assessing applications for credit

Banks are committed to helping you make financial decisions that best suit your circumstances. They want to help ensure that you do not take on more borrowing than you can afford to repay and then have trouble making repayments as they fall due.

As responsible lenders, banks take into account your personal circumstances to try to establish the appropriate level of credit to grant to you. To help them do this, applications may be assessed using a process called credit scoring.

What is credit scoring?
Credit scoring is a technique used to assess the probability that a customer will meet their financial commitments. Credit scoring uses, where available, information from a bank's own records and may include data received from credit reference agencies. These systems help banks make decisions about opening accounts and granting credit by using statistical techniques to measure the likelihood that a customer applying for credit will be an acceptable credit risk. It can also help to accelerate the decision making process.

How does credit scoring work?
Credit scoring takes into account information banks may hold about you, and any information they may obtain from other organisations, such as credit reference or fraud prevention agencies. Where they use information from other organisations, they will tell you who they are. In this objective process, information regarding race, gender disability, colour and religion is not used.

There are very strict rules regarding information obtained from credit reference agencies to ensure your privacy is respected. Other than in exceptional circumstances, information will never be disclosed without your permission.

The credit scoring system allocates points for each piece of relevant information and adds these up to produce a score. When your score reaches a certain level then banks may agree to your application. If your score does not reach this level, they may not. Additionally, banks may have policy rules to determine what sort of financial products they are prepared to offer and at what price. These reflect their commercial experience and requirements.

Sometimes scores are calculated by credit reference agencies and these may be used in an assessment.

The points allocated are based on many factors such as, for example, thorough analysis of large numbers of repayment histories over many years of providing credit. This statistical analysis enables banks to identify characteristics that predict a likelihood of future performance.

Credit scoring is designed to ensure all applicants are treated fairly.

Every credit application involves a certain level of repayment risk for the lender, no matter how reliable or responsible an applicant is. Credit scoring is one of the ways that lenders use to calculate the level of risk associated with lending money, based on the information obtained. If the level of acceptable risk is exceeded, the lender may refuse the application or offer the applicant a more appropriate alternative.

Lenders are not obliged to accept an application. Refusal does not mean that any declined applicant is a bad payer. It simply means that based on the information available, the lender is not prepared to take the risk of granting that facility.

Lenders have different lending policies and scoring systems, and so applications to them may be assessed differently. This means that one lender may accept your application but another may not. You can ask your bank about whether credit-scoring techniques will be used when you are applying for credit.

Is credit scoring fair?
We believe that credit scoring is fair and impartial. It does not single out a specific piece of information as the reason for declining an application and is based on the use of objective criteria to make a decision. Credit scoring methods are tested regularly to make sure they continue to be fair and unbiased.

Responsible lending is essential for you and your bank. The Office of Fair Trading regulates credit and views credit scoring as a way of helping banks lend responsibly.

What is behavioural scoring or predictive scoring?
Behavioural scoring, also known as customer or predictive scoring, is an automated assessment of the way that a customer runs their financial affairs, based on the pattern of activity seen passing though existing customer accounts. As with credit scoring, in this objective process, information regarding race, gender disability, colour and religion is not used.

Behavioural scoring is most effective where customers have been with a bank for a period of time. Statistically, it has been shown to be more consistent in identifying acceptable credit risks to banks than manual assessments of borrowing requests. This information is used to consider credit applications and for the ongoing management of account facilities, such as overdrafts and bank cards, as it builds up an accurate picture of how a customer manages their money, with the underlying principle that previous performance trends can be used to reflect future patterns. An example of a negative indicator might be where cheques or other items have been returned unpaid.

Behavioural scoring may be used in conjunction with credit scoring to enable a lender to decide whether they should lend money or not.

What happens if your application is declined?
If a bank does not wish to accept your application, they will tell you. They will also tell you the main reason why they were unable to agree your application on request. If you did not pass their credit score they will tell you.

If a bank has declined your application you may contact them and ask them to reconsider their decision. They may ask you to provide additional information.

If you are concerned about the way in which your application for credit has been dealt with, you can ask the bank for more information about how the credit scoring system works. If you wish to appeal against a refusal of credit based on a credit scoring system, ask the bank for details of how you can do this.

If you are unhappy about how your concerns have been handled, you can complain. The BankFacts information sheet on 'How to Complain to your Bank' will be helpful. This information sheet is one of a series of BankFacts published by the British Bankers' Association.

What is a credit reference agency?
A credit reference agency holds details of financial and publicly available information. An agency obtains information from a variety of sources, such as banks, finance houses, leasing companies, retail stores and building societies; also from the law courts and from the electoral roll.

As a responsible lender, a bank needs to know about the financial position of a prospective customer if, for example, they are considering opening an account or providing a loan. Information is supplied to assist these decisions, in establishing an individuals identity, credit history and current commitments. If a bank uses a credit reference agency for information about a customer, then the bank must, on request, tell the customer which agency they have used.

Credit reference agencies are not Government organisations but they are strictly regulated under the Consumer Credit Act (1974) and the Data Protection Act (1998) to hold information about individuals, which is of relevance to lenders. They do not give an opinion of the financial status of a customer. A customer's past payment record may indicate they are a credit risk to a bank even if it was due to circumstances beyond their control.

What information do banks disclose to the credit reference agencies and when do they disclose it?
Credit reference agencies hold information on the performance of credit agreements, sometimes called performance data. This information is supplied on an optional basis by lenders but in so doing the lender will then be able to receive details of any performance data held by the agency in order to assist with their own credit decisions.

Banks disclose to credit reference agencies certain information about debts that are owed to them by a customer. Information is disclosed where:

• a customer has fallen behind with their payments; and

• the amount owed is not in dispute; and

• the customer has not made proposals satisfactory to the bank concerning means of repayment following a formal demand; and

• the customer has been given at least 28 days' notice of the bank's intention to disclose information.

• Some banks also share performance data about their customers to further support responsible lending.

Banks will only give other information about a customer (such as how you conduct your account) to credit reference agencies where the customer gives consent, either when the account was opened or subsequently. However, for fraud cases, data is disclosed regardless of consent. What and when information is disclosed to credit reference agencies is covered in the Banking Code.

Under the Banking Code, banks have to provide certain standard information to customers. This information includes telling a customer about the checks a bank may make with credit reference agencies when an application is made and when these details may be passed to a credit reference agency.

What types of information does a credit reference agency hold?
Credit reference agencies hold different types of information, and some will apply to your application. For instance, they hold details of who is on the electoral roll, court judgements and bankruptcies, credit account performances and the number of credit enquiries you have made.

A copy of the information that is held at a credit reference agency is available to you by writing to the following addresses, enclosing a statutory £2.00 fee (cheque or postal order). Remember to provide your full name and all addresses lived at during the past six years. Credit records can also be ordered by telephone or via the internet. Banks will tell you which credit reference agency/agencies they have used.

Experian
Consumer Help Service,
PO Box 8000
Nottingham, NG1 5GX
Tel: 0870241 6212
www.experian.co.uk

Equifax
Credit File Advice Centre
PO Box 1140, 
Bradford, BD1 5US
www.equifax.co.uk 

What can a customer do if they feel the credit reference agency information is wrong?
When you apply for a copy of your file from a credit reference agency they will enclose details of what to do if you feel that your file contains any inaccurate information and what action can be taken to correct it.

Where your bank has supplied to a credit reference agency that you feel is incorrect, you should contact the person dealing with your application, or write to them, explaining why you think that the entry is inaccurate and ask them to amend it. If you have a query relating to the data supplied by another lender, you should write to the lender direct, again asking them to amend it.

What should you do if you encounter difficulties in keeping up payments to a borrowing facility?
You should approach your lender at the earliest opportunity to discuss any financial difficulties you might be experiencing and your ability to make repayments in future. Borrowers can also seek help from money advice bodies such as the Citizens Advice and Money Advice Trust. Your bank will be in a better position to help if difficulties are identified at an early stage. Any delay in seeking help could cause your situation to deteriorate further, which may affect your future ability to obtain credit.

For further information on credit scoring, please also refer to the guide to credit scoring, published by the Office of Fair Trading.