As banks tighten lending criteria, consumers need to be aware of their creditworthiness. CAROLINE MADDENexplains how your reputation is made

PLENTY OF attention has been given lately to the credit ratings of financial institutions and, indeed, countries. But with banks tightening up their lending criteria, consumers need to be particularly conscious of their own creditworthiness.

As anyone who has ever applied for a loan will know, lenders generally request intimate financial details such as your income, employment status, living costs and existing borrowings to assess whether or not you’re a desirable candidate for a loan. However, you might not be aware that they also delve deeper into your financial past by carrying out background credit checks.

Lenders will generally investigate your credit history, as this is a good indicator of how likely you are to repay the new loan. Although you may not spot it in the fine print, when you sign a loan application, you automatically give your lender permission to access information about your credit history from credit reference agencies.

If you have blotted your copybook in the past, for example by forgetting to pay off your credit card on time, missing a payment on a personal loan or falling behind on your mortgage, you are likely to have a poor credit history. If, on the other hand, you’ve been a model borrower, diligently meeting every loan, hire purchase and car loan repayment on time, chances are you’ll have a glowing credit record.

Most lenders use the Irish Credit Bureau (ICB), which is the biggest credit reference agency in Ireland and is owned by financial institutions, as a source of credit history reports. More than 80 lenders send information about borrowers and their loan repayments to the ICB, which holds an individual credit report for each borrower on its database.

Each credit report contains details of loans that the individual holds; repayments made or missed on each loan; loans that were settled for less than the individual owed; and any legal action taken by the lender against that person.

Loans can include a mortgage, personal loan or car loan, as well as leasing and hire-purchase agreements. Credit card details are also included, but overdraft agreements are not monitored by the ICB unless the agreements are the subject of legal proceedings.

The ICB stresses that it doesn’t decide who should get a loan; the information it provides simply helps the lender to make a decision.

In addition to a credit history report, lenders can also request a corresponding credit bureau score from the ICB. Essentially a credit bureau score is a number that summarises your credit report at a particular point in time. “Typically a higher ‘score’ suggests a better prospect of agreed repayments occurring on time and a lower score suggests a lower prospect,” the ICB explains.

However, a high score doesn’t guarantee that the lender will approve your loan, as they may consider other factors as well.

Even when a loan is completed or written off, it remains on the ICB database for five years from that date. This means that it takes five years for an individual with a damaged credit history to wipe the slate clean.

However, it is possible to boost your credit bureau score, for example by making timely repayments on all of your current loans and avoiding making excessive applications for credit, the ICB says.

As well as requesting information from the ICB, some lenders also investigate whether any court judgments have been granted against an individual (which means that they have been pursued through the courts over unpaid debts).

Credit bureau BusinessPro, which publishes Stubbs Gazette, runs an online consumer credit database, where its clients can find information on registered and unregistered judgments, and can see whether or not a person is a disqualified director and so on.

BusinessPro managing director James Treacy explains that their database compiles information from the Revenue Commissioners, telephone companies, credit unions and, in fact, any organisation that has brought an individual to court for non-payment of debts.

Every consumer in their database is given a credit score between zero and 100. A score of between 90 and 100 indicates that the person is a very low credit risk, and he says that 95 per cent of people in Ireland fall into this category. A score of between 0 and 39 represents a very high credit risk. Not surprisingly, a quick search on the database reveals that rogue solicitor Thomas Byrne has a credit score of zero.

“The likes of Thomas Byrne and Michael Lynn – we would have had them on our credit bureau as ‘extreme high risk’ as far back as 1996 or 1997. Thomas Byrne, for example, had a judgment from the Revenue Commissioners in 1996,” says Treacy.

“So if the banks were privy to this, they wouldn’t have touched him with a bargepole.”

According to Treacy, most of the big mortgage providers, some of the subsidiaries of the main banks, and all of the subprime lenders (although most of these have now exited the market) use BusinessPro’s consumer credit database to assess the creditworthiness of individuals.

Searches typically relate to loan applications, but a poor credit score could potentially affect more than just your ability to borrow. Other organisations such as telephone companies also use the database to check out potential customers.

A number of insurance companies also use the facility, typically if they discover that a customer has been making false claims on their insurance policy and they want to build up a case against them.

“You would find generally that somebody who is being brought to court for putting in false insurance claims, 99 per cent of the time you’ll also find that they also have judgments by telephone companies, banks, credit unions ... so there is a pattern,” says Treacy.

“If somebody has three or four judgments against them ... they will be more likely to commit insurance fraud than somebody who hasn’t got any judgments against them.”

One weakness in the Irish credit risk assessment system is that there isn’t one universal consumer credit bureau – instead a number of separate bureau collect different data. This makes it difficult for lenders to build up a complete financial profile of a loan applicant.

According to Treacy, banks in Britain and the US use a multi-bureau approach to ensure that they have a complete picture of an individual’s creditworthiness. “Unfortunately in Ireland, currently the banks don’t have the multi-bureau approach. They rely on ICB because they own it.”

Obviously as a competitor to ICB, it’s in his own interest to argue for a multi-bureau or universal bureau approach, but Treacy is not alone in this view.

In a briefing to the Oireachtas Joint Committee on Economic and Regulatory Affairs in November, the Free Legal Advice Centres (Flac) said that more than 500 credit unions as well as a large number of licensed moneylenders did not subscribe to the ICB.

“Thus, it is clear that the ICB cannot necessarily provide a complete picture of a person’s financial commitments in every case,” it argued.

It questioned whether the current system of credit checking in Ireland is adequate to protect borrowers from over-indebtedness, and asked the committee to consider whether a national database to which all lenders must subscribe would be preferable.

How to check your profile

IF YOU'VE been turned down for a loan, or you're simply curious, it's worth checking your credit report with the Irish Credit Bureau (ICB) to see what information it holds – not least because it costs just €6 to do so.

Obtaining a copy of your credit report is pretty straightforward as you can now apply online. Simply log onto www.icb.ie, click on the relevant link and complete the form. The €6 application fee can be also paid online using a debit or credit card.

Alternatively you can download an application form from the website, or call the ICB on (01) 2600388 to request one by post, and submit it with a postal order or bank draft for €6 to the ICB.

Requests for credit reports are typically processed within three to four working days once the ICB receives the application form, but if more information is required from the applicant, it will take a little longer.

Once you receive your credit report, it's quite possible that you may spot a mistake. The fault could lie with you or your lender. For example, you may have completed a direct debit form incorrectly and missed a loan repayment due date as a result, or your lender may have granted you a moratorium on a loan for a period, but forgot to indicate this on the report sent to the ICB.

"By law, financial institutions must ensure that information they hold or give to anyone else about you is correct and up to date. So you have the right to insist that they correct any incorrect information about you," the ICB says. "If you find a mistake in your report, ask your lender to write to the ICB with details of the change, and request a copy of their letter."

The ICB can't change your report unless a lender requests it to do so in writing. Borrowers should bear in mind that a bad credit record can't be changed if all the information is correct.

Most lenders will act swiftly to correct any mistakes and amend your credit report, but if there is a delay or they fail to sort out the situation, you should make a formal complaint and refer to matter to the Office of the Data Protection Commissioner (www.dataprotection.ie).

Your credit report is also useful because it shows a "footprint" of any institutions that have accessed it within the previous 12 months, so you can find out which lenders, if any, have been snooping about in your records.