Forget loan sharks – credit ratings agencies are the real predators

It’s been a busy month for birds of prey. First David Aaronovitch called Ed Miliband a “vulture” who scavenged political points from the Syria debate. Then Unite attacked the loan company Wonga, calling them “vulture capitalists” who “prey on the financially vulnerable”. I’m about to add a third bird to the list: because I think credit reference agencies are the biggest vultures of all.

At Conference there was much talk about loan sharks and the damaging effect they have on families. A loan shark like Wonga makes one million pounds a week from lending small amounts of money at huge rates of interest to desperate people who can’t get loans anywhere else.

But loan sharks are only one part of the story. Credit ratings are the shadier side of the payday loan problem. After all, why do people turn to companies like Wonga? Because they can’t get a loan anywhere else. The reason? Their poor credit rating.

Everyone has a credit rating – but this rating is usually hidden. Thanks to the Data Protection Act 1997, you can now request your personal credit rating from a credit reference agency like Equifax and Experian – at a fee of £2.

Consumers can’t upload information from reliable referees– like landlords’ references, rent payments, bank managers’ recommendations or salary slips – onto their credit ratings. But a whole range of companies with less reliable track records – like mobile phone and online credit card companies – can access and amend ordinary people’s credit ratings. These companies can put a black mark on a customer’s records if they pay late, dispute a bill or change address. Debts for tiny amounts can result in a company putting a notice on a credit rating, ruining a customer’s mortgage application. Even after the debt has been paid off and the mistake resolved, the company can refuse to remove the negative notice, which stays on a credit rating for 6 years.

The upshot of this is that a consumer who has a brilliant salary, who always pays rent on time and who is keeps good financial records, could get a black mark against their name when they change address, spend £7 on a cancelled Amazon credit card, check a car insurance policy or forget to pay an O2 phone bill. Consumers can be unfairly tarred by association if they share bills with a flatmate or partner who has a poor rating. And an error – like when Virgin Media recorded a £30 debt on Yvonne Oliver’s spotless consumer rating by mistake – can ruin ‘innocent’ customers’ credit ratings and mean they lose their mortgage, their bank loan or their good name.

The companies often don’t bother to write to the customer about their intention to ruin his or her credit rating. This means people often only find out about their dodgy rating  years later, and get a nasty shock when they’re trying to get a mortgage or rent a car. To work out what has gone wrong, a customer will have to contact a credit reference agencies – vultures through and through.

Credit reference agencies like Experian and Equifax have made themselves indispensable in the customer-company process, without having to be accurate, fair, accessible or transparent. These are the true vultures of the credit industry. The legislation governing credit reference agencies in this country is way out of date – a Data Protection Act from 1997 and a Consumer Credit Act from 1974.

This Summer, the EU issued new regulations to make it harder for credit ratings agencies to prey on member states – and it’s high time they introduced regulations to stop smaller credit reference agencies preying on ordinary citizens, too.

Credit ratings are an important public service, a vital indication that helps lenders decide who to do business with and gives responsible consumers access to greater credit. We need proper, modern legislation to regulate just who can put black marks on people’s credit ratings – and a credit ombudsman for consumers to challenge companies’ reports. We also need to make sure consumers can access their records for free (as they can in Canada), and upload reliable financial information such as salary and rent payment onto their credit ratings, too.

Without these new regulations, credit reference agencies will keep posting inaccurate and unfair notices on customers’ accounts, banks will keep turning borrowers away – and the loan sharks will keep doing very good business.