Lenders are not only sharing even more data about you between themselves, but they are also trampling all over your credit report.
Over the last couple of years, plenty of people have become a lot more paranoid about their credit ratings.
What happens to my rating if I get rejected for this credit card? Or that mortgage? And does it reflect badly on me if I make minimum payments on my card?
It's understandable - with the credit crunch biting hard, lenders only need the slightest excuse to send you packing, and it's no great surprise that having rejections on your record is not a good thing.
However, it's emerged that lenders themselves are damaging your credit rating - and there's little you can do about it!
Lenders make 'hard' footprints
We at lovemoney.com have always urged you to shop around for all of your financial products. However, if you're not careful, this may actually do you damage, thanks to the lenders' antics.
It emerged last week that banks and building societies are being unnecessarily heavy-handed when conducting credit checks.
When you are looking for a mortgage, the first step is to request a decision in principle from the lender. This is basically an indication of whether they are likely to want to lend to you, but is also very important in demonstrating you are serious to estate agents or home sellers.
And traditionally, to help them make that decision, the lender would only need to do a 'quotation search' (which doesn't leave a footprint on your report) rather than a full credit check.
Only when you make a full application would the lender go for a full credit check, which leaves a 'hard' footprint on your credit report.
However, lenders have now been accused of going the whole hog with a full credit check at this earlier 'decision in principle' stage.
Why is this bad?
If you are shopping around for a mortgage, and get a number of decisions in principle, then you suddenly have a number of footprints on your credit report.
And that's a terrible position to be in, as it may suggest to other lenders in the future that you were rejected by a large number of credit firms or are desperate for credit. Result: you appear to present a greater credit risk, and so could get turned down more often in the future.
This is outrageous!
Considering FSA rules prohibit lenders from doing anything which stops customers shopping around, I think it is staggering that mortgage lenders are getting away with this.
Unfortunately there is very little you can do about it. You can ask the lender explicitly to only carry out a quotation search, but they will not be obliged to do so.
The only way to tackle it is to apply for a few deals as possible. So do your research, do your sums and get advice on which deal is the right deal for you -but don't shop around in the sense of making multiple applications for multiple deals.
Also, if you check your credit report and you find several lenders have applied hard footprints when you didn't expect them to, you could always complain and ask them to remove their checks from your file. Or you could write a notice of correction, explaining what happened and how you weren't aware lots of credit checks would be carried out.
Sharing new information
The other key development you should be aware of when it comes to your credit rating is that, back in December, the members of APACS, the UK payments association, committed to sharing extra 'behavioural' information about us all and our credit card habits, in an attempt to prevent over-indebtedness.
What are they sharing?
For some time credit card providers have shared information on the customer's balance, credit limit, and whether payments are up to date.
However, now the credit card firms are sharing extra fields of information, including:
- The amount you paid off last month
- Whether the customer has signed up to any promotional deals (for example, a low interest balance transfer)
- Whether you are only paying the minimum payment on your credit card
- How often a credit card is used for cash withdrawals
Those last two fields are pretty significant in my view.
If somebody is withdrawing cash from an ATM on a credit card, that's a pretty good sign that they are struggling financially. And there is a world of difference between someone paying the minimum because they are struggling with their money, or paying the minimum because they are in the middle of a great promotional period.
Now, the lenders are still working out just how to use this information, so exactly how much difference it will make to their decisions to lend to borrowers is open to debate.
While there are those that think that this is yet another step towards Big Brother, I prefer to look on the bright side - with all this information at their fingertips, there's really no reason for credit to be given to those who really cannot afford it.
Don't forget that student loan!
Those of us who graduated relatively recently have an easy time of it with our student loans, as they come directly out of our wage packets each month.
However, if you took out a student loan before 1998, then it might come back to haunt you and your credit rating.
The Student Loans Company has written to those graduates who are consistently failing to pay (reported at around 60,000) to discuss their repayment options. Should the former student not reply within 28 days, they will be given a black mark against their credit record - definitely something to avoid!
Keep your credit report clean!
With all this extra information being shared, it's absolutely imperative to ensure your credit report is as squeaky clean as it can possibly be.
There are three absolute essentials which you should live by.
1. Always pay all of your bills, on time. A missed payment is a nightmare to have on your credit report, as it suggests 'financial mismanagement'.
2. Close accounts with existing credit you no longer plan to use. If you have four credit cards sitting in your wallet, and will only ever use two of them, then it's a good idea to cancel the other two before you apply for any further credit. Banks won't want to lend to you if they see you have plenty of untapped credit already at your disposal.
3. Get registered on the electoral roll. Lenders use this as a primary method of checking your name and address details are correct - if you aren't on it, you will find it much more difficult to get credit.
Don't forget you can get a free credit report from Experian via lovemoney.com, which allows you to check whether any hard footprints have recently been applied to your credit rating. (Just don't forget to cancel this report after 30 days as otherwise you'll be charged a monthly membership fee.)