Credit Referencing

A consumer credit check is NOT a credit score

Put simply, the difference between a credit check and a credit score is that the credit check provides only information, whereas a credit score uses that and any other available information to provide guidance as to what lending decision should be made.

It is not designed to make the lending decision but is a tool which produces a recommendation. Ultimately, it is always up to the credit union to decide whether or not to accept that recommendation.

A full consumer credit check provides the following information on the individual who is applying for a loan:

• Name and address confirmation
• Any County Court Judgements
• Details of any bankruptcy, insolvency and voluntary arrangements, such as Trust Deeds
• Details of previous credit searches
• Information on any existing borrowings and payment history

It is possible to get lower levels of information but the full check is recommended for responsible lending.

Why Use a credit referencing?

Many British credit unions suffer from high delinquency, which cannot be covered by charging higher rates of interest, due to regulatory controls. As a result, many credit unions struggle to become or remain financially viable, without relying on external funding. Although our members’ deposits are now protected, the failure of any credit union is damaging to the movement and to the confidence of our members.

The evidence from ABCUL projects has been that lending practices can be restrictive and, as well as resulting in high delinquency, stifle growth by forcing many potential members to go elsewhere for loans.

In addition to these findings, recent UK and EU consultations on consumer credit have sought to define what is considered to be irresponsible lending, in order to improve consumer protection.

Proposals include mandatory consumer credit checks from a central national database. The reason for this is that so many people are becoming over-indebted and being forced either into using unscrupulous lenders or into bankruptcy.

A consumer credit check gives a true picture of how much borrowing the individual has (or has recently applied for) and enables the credit union to find alternative ways of helping its member avoid falling into a hopeless spiral of mounting debt. This gives the credit union more and better information on which to base its lending decisions. This additional information will enable credit unions to tackle financial exclusion far more effectively as the best answer is often not to lend more but to assist members with saving and budgeting skills

All of these aims – the protection of members’ money, responsible lending and avoidance of bad debt – are entirely consistent with the traditional values of the credit union movement.

ABCUL is able to provide further information on credit referencing and agencies.