What is a credit reference agency?

Credit reference agencies (CRAs) play a crucial role in our financial ecosystem. These independent organisations collect, maintain, and provide valuable credit information to lenders, service providers, and other authorised parties. Their primary purpose is to facilitate responsible lending, minimise credit risk, and empower individuals to understand and manage their credit scores effectively.

But what exactly do credit reference agencies do, and how do they impact our financial lives? In this article, we’ll delve into the roles of CRAs, explore what a typical credit reference looks like, and shed light on the process that occurs during a credit check. Read on to find out more… 

What is the role of a credit reference agency?

A credit reference agency (CRA) is an independent organisation that collects, maintains, and provides information about individuals' and businesses' credit history, and their financial behaviour. There are three main credit reference agencies in the UK, which are (we explain more about these in the section below):

1. Experian
2. Equifax
3. TransUnion

The primary roles of a credit reference agency

• Collecting and maintaining credit data - They gather information from various sources, such as banks and credit card companies.
• Providing credit reports - They supply reports to lenders, landlords, and other authorised parties when an individual applies for credit, such as a car loan.
• Calculating credit scores - They use the information in their database to generate credit scores, which are numerical representations of an individual's creditworthiness.
• Fraud prevention - They help prevent fraud by verifying the identity of credit applicants and detecting suspicious activities or inconsistencies in credit applications.
• Assisting with responsible lending - By providing comprehensive credit data, they help lenders make informed decisions and lend responsibly, reducing the risk of borrowers taking on unaffordable debt.
• Enabling individuals to access their credit data - They are required by law to provide individuals with access to their credit reports and allow them to correct any errors or inaccuracies in their credit files.

How does a credit reference agency work?

When an individual applies for credit - whether it's a car loan, credit card, or even a mobile phone contract - the lender initiates a credit check with one or more credit reference agencies (CRAs). During this process, the CRA provides the lender with a detailed credit report and a credit score. Lenders use this information to make informed decisions, weighing up the risk of lending against the applicant's credit history.

As we’ve explained in the section above, CRAs also play a vital role in fraud prevention, identity verification, and promoting responsible lending practices. By maintaining accurate and up-to-date credit information, they help lenders avoid offering credit to high-risk individuals, as well as protecting consumers from taking on unaffordable debt that they’ll be unable to repay.

What are the credit reference agencies in the UK?

The three main credit reference agencies (CRAs) in the UK are:

1. Experian - The largest CRA in the UK, operating globally. It holds credit information on over 45 million individuals and 2.5 million businesses in the UK.

2. Equifax - Another major CRA in the UK, with a significant presence in the United States and other countries too.

3. TransUnion - It is the third-largest CRA in the UK and is so-called because it was acquired by the US-based business of the same name in 2018. 

Each agency is independently regulated by the Financial Conduct Authority (FCA) and the Information Commissioner's Office (ICO) to ensure fair and transparent practices in handling consumer credit data. While these are the main CRAs in the UK, there are also some smaller, specialised agencies that cater to specific market segments.

What does a credit reference look like?

A credit reference - also known as a credit report - is a detailed document that contains information about an individual's credit history and financial behaviour. Credit reports are compiled by credit reference agencies (CRAs) and typically include the following details:

• Personal information (such as the individual's name, date of birth, current and previous addresses, and electoral roll information).
• Credit accounts (such as credit cards, loans, mortgages, and store cards).
• Payment history (to determine whether the individual has made payments on time, missed payments, or defaulted on any accounts). 
• Credit utilisation (to show how much of the available credit the individual is actually using).
• Credit searches (such as a hard or soft credit check).
• Public records (such as County Court Judgments (CCJs), bankruptcies, and Individual Voluntary Arrangements (IVAs)).
• Financial associations (such as joint credit accounts with a spouse or business partner). 
• Credit score (a numerical score that determines an individual’s creditworthiness).

Do you have to pay for a credit check?

Whether you have to pay for a credit check in the UK depends on who is requesting the check and for what purpose. As an individual, you generally do not have to pay for a credit check when applying for credit, or requesting your own credit report. 

However, there are situations where you may have to pay for a credit check, such as in the case of requesting a comprehensive credit report, employment credit checks, or business credit checks. 

How do credit reference agencies make money?

Credit reference agencies (CRAs) in the UK operate as commercial businesses and generate revenue through the various services they offer. This includes selling credit reports to lenders, providing credit scores to lenders, identification verification services to businesses, and fraud prevention services.

While CRAs generate revenue primarily by charging businesses for their services, they are required to provide individuals with free access to their credit reports at least once a year, and they must follow strict data protection laws when collecting, storing, and sharing credit information.

How far does a credit check go back?

Credit checks typically cover the past six years of an individual's credit history. This is because most negative credit information - such as late payments, defaults, and County Court Judgments (CCJs) - are removed from credit reports after this time. 

But, there are some exceptions to this rule, so it’s worth being aware of the following credit check timelines: 

Bankruptcy

Bankruptcy information remains on an individual's credit report for six years from the date of the bankruptcy order, or until it is discharged, whichever is later. If the bankruptcy is not discharged, it can remain on the credit report indefinitely.

Individual Voluntary Arrangements

Individual Voluntary Arrangements (IVAs) are recorded on credit reports for six years from the date they start, even if they are completed in less time.

Debt Relief Orders

Debt Relief Orders (DROs) are recorded on credit reports for six years from the date they are issued.

Searches

Hard credit searches (which occur when an individual applies for credit) remain on credit reports for 12 months. These searches are visible to other lenders and can impact credit scores (both positively and negatively).

Closed accounts

Even after an account is closed, it can still appear on an individual's credit report for six years from the date of closure.

What is a good credit score?

Each credit reference agency (CRA) uses its own scoring system and range, so what constitutes a ‘good’ credit score can vary depending on the individual agency. Generally speaking though, a good credit score is considered to be at the higher end of the ‘fair’ range or above. For Experian, this would be a score of 881 or higher. For Equifax, a score of 670 or above is considered good, and for TransUnion, a score of 720 or above is deemed good.

However, it's important to remember that lenders also have their own criteria for assessing creditworthiness. Some may have higher or lower score requirements, and they may also consider other factors, such as income, employment status, and debt-to-income ratio when making lending decisions.

For more information about credit scores, including what score is required for car finance, how to improve your credit score, and what to do if you’re refused car finance, visit the Credit Score section of our news pages where we discuss these topics in more detail.

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