1. What is a credit report?

Most adults in the UK make use of credit as part of their money management. For example, we rely on mortgages to help buy our homes, use credit and store cards for shopping and online spending, and take out personal loans to pay for cars, holidays, home improvements, etc.

Indeed, credit is big business in Britain. According to the Bank of England, at the end of 2006, mortgage debt stood at a record £1.08 trillion, with consumer credit (cards, loans, overdrafts and other non-mortgage debt) totalling a further £213 billion.

Of course, when you approach a lender to apply for credit, it needs to obtain factual information about you and your ability to repay any potential debt. In order to help them to lend responsibly, banks, building societies and other lenders rely on consumer data supplied by companies known as credit reference agencies.

In the UK, there are three main credit reference agencies: Experian, Equifax and Callcredit. Lenders provide these companies with information -- both positive and negative -- on customers and their credit histories, which lenders can then use when they make lending decisions. Hence, a lender will draw on pooled information from many sources when assessing whether you are a good customer to lend to. This personal record of your lending habits and history is known as your credit report.

It’s important to understand that credit reference agencies merely bring together consumer data which the credit industry relies on. Credit reference agencies don’t make lending decisions, nor are they told whether applications for credit have been accepted or refused. In fact, the information that these firms hold usually helps people to get credit, rather than hindering applications. Furthermore, credit reports are a vital tool in the fight against financial fraud.

Until fairly recently, some lenders were reluctant to share information about their customers, perhaps because they felt that providing this data to credit reference agencies would take away some competitive advantage. However, with lending levels and bad debts rising considerably in recent years, all major lenders have agreed to share more customer information with the credit reference agencies. Over time, this should improve lending decisions and help consumers to avoid taking on excessive levels of debt.

Normally each time you apply for credit, the search is recorded on your credit file. This ‘credit footprint’ tells other lenders that you have made an application for credit. Making several applications for credit in a short period of time can have a negative effect on your credit rating.

Rate this insider’s guide