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ombudsman news

issue 117

May/June 2014

case studies - credit files and credit reference agencies

Although awareness of credit files has grown over the past few years - largely in the context of debt and financial difficulties - they remain something many people don’t really think about. And yet credit ratings can have a huge impact on people’s lives - affecting activities ranging from mortgage and loan applications, to taking out mobile phone contracts and credit cards.

Credit reports mostly operate in the background - away from people’s day-to-day attention. So it’s understandable that many consumers don’t know how their credit report works or what’s kept on it - and people often don’t realise there’s a problem until it’s too late. It’s only when trying to apply for some form of credit that they discover their credit rating is a stumbling block.

So the correct and responsible handling of credit files is very important - as incorrectly-recorded information or delays updating a file can have considerable knock-on effects.

We inevitably see complaints about the administration of credit files. For example, we see cases where a consumer has cancelled a subscription - sometimes after a free trial - only to find their request hasn’t been processed, and they’ve ended up with a mark on their credit file.

However, in the case studies that follow we share some of the common, but less
well-explored areas of confusion we see in complaints involving credit files. These range from problems with joint-accounts and payment plans - to consumers finding they can’t get credit because of the information held about them.

Another area we look at is poor communication - or the absence of communication - between credit reference agencies and other financial businesses. This can sometimes lead to consumers being disadvantaged. And as the case studies show, the language of credit files and credit reference agencies is very important too - as many people struggle to understand the reasons behind what’s happened with their credit files.

issue 117 index of case studies

  • 117/9 - consumer complains that his credit report showed missed payments - when he had agreed a reduced payment plan with his bank
  • 117/10 - consumer complains that bank recorded default on joint loan on her credit file - because her husband entered into an IVA
  • 117/11 - consumer complains that bank failed to send his credit card statements - and registered information on his credit report when he missed his payments
  • 117/12 -consumer complains bank has registered default on credit card account - when a reduced payment plan was in place
  • 117/13 -consumer complains that bank has recorded paid-off debt as “partially settled” - rather than “settled”
  • 117/14 - consumer complains mortgage offer has been withdrawn - because someone else’s information has been wrongly recorded on his credit file

consumer complains that his credit report showed missed payments - when he had agreed a reduced payment plan with his bank

When Mr S found he was struggling to make the repayments on his loan, he phoned his bank and agreed a reduced repayment plan. Mr S made his monthly payments in line with this plan - without missing a payment.

A couple of years later, when Mr S’s finances improved, he paid off his debts and applied for a mortgage. However, the mortgage provider told him he wasn’t eligible for the best interest rate because his credit rating wasn’t good enough.

Mr S went online and checked his credit report. He found that it showed missed payments - and his account was shown as “delinquent”.

Mr S wasn’t sure what “delinquent” meant in this context - and he was sure he hadn’t missed any payments on his loan. So he phoned his bank to find out what was going on.

The bank told him that the information they had recorded on his credit report was accurate. But Mr S didn’t agree, and complained. He pointed out that he had never missed a payment on his loan - and in fact, that he had agreed a reduced payment plan with the bank precisely because he wanted to avoid missing a payment. Mr S said he accepted that the reduced payment plan should appear on his credit report - but said the account shouldn’t show as “delinquent”.

The bank replied, saying that the information on Mr S’s credit report was accurate - and that they hadn’t done anything wrong. Unhappy with this response, Mr S got in touch with us.

complaint not upheld
When we spoke to the bank, they agreed that Mr S hadn’t missed any payments on his reduced payment plan. So we needed to consider whether what the bank had reported to the credit reference agencies was accurate.

We asked Mr S to send us a copy of his full credit report. And we asked the bank to explain exactly what it had reported to the credit reference agencies. The bank also sent us a copy of some guidance it had received from one of the credit reference agencies on how to report information. The guidance said that, even when a customer has agreed a reduced repayment plan, any arrears that accrue on the account must still be reported.

The bank’s records showed that although Mr S hadn’t missed a payment, arrears were building up on his account because he was making less than the full payment each month. The bank reported these arrears to the credit reference agencies and, when they added up to more than one full monthly payment, it showed as a “missed payment” on Mr S’s credit file.

So we found that the bank had sent accurate information to the credit reference agencies - because they were reporting the arrears that were building up on Mr S’s account. The credit reference agency that Mr S had requested his credit report from recorded arrears as “missed payments”.

We also established that the credit reference agency recorded an account as “delinquent” when it had more than three months’ worth of arrears on it. We could understand that this had been confusing for Mr S - but it wasn’t anything to do with the way the bank had reported information about his account.

We rang Mr S to explain what had happened. He said he understood, and was happy to leave the complaint there. But he said he still thought the way his account had been described on his credit report was very confusing.

consumer complains that bank recorded default on joint loan on her credit file - because her husband entered into an IVA

Mr and Mrs R had a joint loan. After they separated, both their names stayed on the loan - but Mr R stopped paying his contribution, and Mrs R made the full loan repayments herself.

Six months later, Mr R was struggling financially and entered into an Individual Voluntary Arrangement (IVA). Mrs R called her bank to find out whether her husband’s IVA would affect her. The bank reassured Mrs R that as long as she continued to make the full loan repayments, her husband’s IVA would not have any effect on her credit file. However, the bank went on to record a default on Mrs R’s credit file in relation to the loan account.

When Mrs R found out what had happened, she complained to the bank. She pointed out that the bank had told her that she wouldn’t be affected by her husband’s IVA - and that nothing would show up on her credit file.

The bank accepted that they’d made a mistake when they told Mrs R that her credit file wouldn’t be affected - and they offered her some compensation to make up for their mistake. But they said they’d acted correctly when they recorded the default on her credit file - and refused to remove the default on her account.

Mrs R complained again - saying that she thought the bank wasn’t treating her fairly. When the bank turned down her complaint, she asked us to step in.

complaint upheld
We needed to establish whether the bank had acted fairly and reasonably when it recorded a default on Mrs R’s credit file. The bank told us that they couldn’t report different information for the individual holders of a joint account - and so it was their policy to record a default on the credit files of both account holders when one of them entered into an IVA. Because of this, the bank said that Mrs R’s credit report had to show a default if her husband’s credit file showed one.

We noted that Mrs R had made all the monthly payments on her loan. So we took the view that it wasn’t fair for Mrs R to have a default recorded against her just because the bank had limited ways of recording information with the credit reference agencies.

In these circumstances, we told the bank to make sure they found a way of removing the default from Mrs R’s credit file - and to pay her additional compensation for the trouble they had put her to.

consumer complains that bank failed to send his credit card statements - and registered information on his credit report when he missed his payments

In December Mr A received a letter from his bank saying that he had missed two monthly payments on his credit card - and that his account had gone into arrears. Mr A phoned the bank and explained that he hadn’t received a statement for the last two months - so he hadn’t known how much to pay.

The person on the bank’s helpline told Mr A not to worry. They said he could make a payment straight away to clear the arrears, and that there would be no problem with his credit report. Mr A made a payment over the phone and brought the account back up to date.

But when Mr A tried to set up a new phone contract a few weeks later, he was told he’d failed the credit check. He looked at his credit report online - and was surprised and confused to see that the bank had recorded two “missed payment” markers on his credit file.

Mr A was unhappy with what the bank had done - and he made a complaint. He said he’d been told that there wouldn’t be a problem with his credit file - and that it was unfair that the bank was blaming him when it was their fault he hadn’t received his monthly statements. He pointed out that he had always paid his bill on time and had never missed any other payments. And he said he was concerned that he would struggle to get a mortgage or other credit in the future.

The bank responded to Mr A, saying they couldn’t find any reason why he hadn’t received his statements. They also said that the missed payment markers were “a true and accurate reflection of the running of the account”. They accepted that they had got it wrong when they’d told Mr A that there wouldn’t be any information recorded on his credit file about the missed payments - and they offered to pay him £200 compensation.

But Mr A still wasn’t happy with this - and got in touch with us.

complaint resolved
The bank accepted that their adviser had incorrectly told Mr A that his credit report wouldn’t be affected. But they felt the compensation they’d already offered him was reasonable.

We asked the bank for evidence that they had issued the statements - and sent them to the correct address. Looking at the records they sent us, we didn’t see anything to suggest that the bank hadn’t sent the statements.

However, we didn’t find any reason to doubt Mr A when he said he hadn’t actually received the statements. And looking at the history of Mr A’s credit card account, we saw that he had never missed a payment before. So we decided it was possible there had been a problem with the post.

We took the view that if Mr A had received the statements, he would probably have made the payments. We also noted that he used his credit card regularly - and would have had a balance to pay off most months. Given this, we couldn’t quite understand why Mr A was saying that the only reason he hadn’t made the payments was because he hadn’t received a statement.

We explained to Mr A that we didn’t doubt that his statements hadn’t arrived. But that we felt he still would have been aware of the need to make the payments. We were satisfied that the bank had passed on accurate information to the credit reference agencies. And because the bank hadn’t made an error, we didn’t ask them to remove the information relating to the missed payments.

However, as part of our investigation, we discussed with the bank the fact that the information on his credit file could affect Mr A’s ability to get credit in the future. In the circumstances, they said they would remove the information as a gesture of goodwill.

consumer complains bank has registered default on credit card account - when a reduced payment plan was in place

Over the summer, Miss L was having difficulties managing her credit card account. She frequently went over her credit limit and had missed a few payments, putting her account into arrears. By the autumn, she had brought her account up to date - but had recently gone over her credit limit again.

Recognising she was having some difficulty with her finances, Miss L contacted her bank to see whether they would accept a lower minimum payment for her credit card account. The bank agreed to Miss L’s offer. Very shortly afterwards, however, the bank sent Miss L a default notice.

Unfortunately, Miss L had missed the first payment under the new arrangement. But she quickly caught up - and by early the next year her financial situation had improved enough for her to be able to clear the outstanding balance on the card. Once she had done this, she complained to the bank that the default notice had been unfair.

The bank told Miss L that they hadn’t made an error. They said they had registered a payment plan - and when Miss L hadn’t kept to it, the correct process to follow was to issue a default notice. Miss L didn’t accept this explanation and brought the complaint to us.

complaint upheld
The bank told us that they considered the default was an accurate reflection of the way the account was run - so they wouldn’t arrange to remove it.

We considered whether the bank had followed the Information Commissioner’s Office (ICO) guidance about registering a default. We noted that if a creditor classes a consumer’s offer as a “token” payment which they don’t think is acceptable, they can apply a default immediately.

However, it was clear that the bank had accepted the amount Miss L had offered - and that an agreed temporary arrangement was in place. In these circumstances, the guidance said that a default could be issued if the account was three months or more in arrears.

The bank had issued the default immediately after Miss L missed her first payment under the arrangement she’d agreed with them. We noted that at this time, Miss L wasn’t three months in arrears. Looking at the ICO’s guidance, it seemed the bank had acted as if Miss L had been making “token” payments.

In our view, however, the amount Miss L had offered was too high to be considered a “token” payment. In any case, the bank had accepted Miss L’s offer - and so they shouldn’t have issued the default notice unless Miss L had been three months or more in arrears.

We considered whether the bank’s relationship with Miss L had broken down. But we explained to the bank that we didn’t think that it had. Miss L had kept the bank up to date with her situation and had offered a repayment plan - which we thought showed she wanted to cooperate and pay back what she owed. Likewise, the bank had shown it was willing to cooperate with Miss L by agreeing to the plan.

In the circumstances, we told the bank to remove the default from Miss L’s account - making sure her credit file reflected what had actually happened, while still recording the fact a repayment plan had been put in place. We also recommended that the bank compensate Miss L for the upset their error had caused her, which they agreed to do.

consumer complains that bank has recorded paid-off debt as “partially settled” - rather than “settled”

In early February, Mr C lost his job. He started to search for work - but it was taking longer to find something than he had hoped. He found himself falling deeper into arrears and missing payments on his credit card.

Worried about the consequences of missing payments, Mr C contacted his bank to see if he could pay a smaller sum each month towards his credit card balance. The bank seemed to appreciate Mr C’s situation - and agreed, in the circumstances, to allow Mr C to make lower payments.

Unfortunately, Mr C soon realised he wouldn’t even be able to pay the reduced amount every month. So he contacted the bank again. This time, they agreed to give him three months to try and sort out his finances - and avoid his account defaulting. But Mr C was still unable to find a job - and so couldn’t meet the payments he’d agreed to. After the three months passed, the bank suspended interest on the credit card account.

After six months, Mr C found a new job. Because there hadn’t been any interest accruing on his debt, he was able to reduce the debt quite quickly. Then, following discussions with Mr C, the bank decided to accept 80% of the remaining debt in full and final settlement - and Mr C paid this amount.

However, the bank put a default marker on Mr C’s credit file showing the debt as only “partially settled”. Mr C thought this was unfair. He complained to the bank, saying that as the bank had agreed to accept less than the full amount, the marker should say “settled” instead. He also said the default should have been applied earlier - when the debt was greatest - so that it would “drop off” his credit file sooner.

However, the bank disagreed - and Mr C contacted us for help.

complaint partially upheld
First, we considered whether the credit marker should say “partially settled” or just “settled”. We explained to Mr C that although his bank had agreed to accept less than the full debt to resolve the matter, this still meant they hadn’t recouped all of the money they were owed. So we thought it was fair that a “partially settled” marker had been added to his credit file.

Next, we turned to the timing of the mark on Mr C’s credit file. We were mindful that defaults stay on a credit file for six years - and can have a big impact on someone’s chances of securing credit. When we looked into the sequence of events, we took the view that a default shouldn’t have been added while Mr C was making the minimum payments he was contractually obliged to make.

So we had to decide when the default should have been registered. Looking at the account, we decided that the default should have been marked on Mr C’s credit file when he failed to meet the terms of his repayment plan - at the point that the bank stopped applying interest to his debt. This was three months after he’d informed the bank of his situation and he’d been given time to sort out his finances.

We told the bank to back-date the marker on Mr C’s credit file - to reflect more accurately exactly when he had defaulted on his payments. This meant that the default would “drop off” at the earlier time, and not disadvantage Mr C for longer than was fair. The bank agreed - and volunteered to pay Mr C £100 for the frustration and worry they had caused him.

consumer complains mortgage offer has been withdrawn - because someone else’s information has been wrongly recorded on his credit file

Mr J had been looking to move house, and approached a broker to help him find a mortgage. The broker arranged a “mortgage offer in principle” - and shortly afterwards, Mr J bought a house at an auction. However, when Mr J got in touch with his broker to let them know, he was told that particular mortgage offer was no longer available. The broker said this was because the lender had found there was some negative information on Mr J’s credit file. The broker had managed to find another lender willing to lend to Mr J - but at a higher interest rate.

Mr J wasn’t aware of any reason why any negative information would have been recorded on his credit file. But because he needed to pay for the house quickly, he didn’t feel he could pursue the matter straight away - so he accepted the new offer.

Mr J then paid to look at his credit file to see what the problem could be. He was very surprised to find several defaults had been recorded - relating to various credit accounts and mortgages that he’d never taken out. He queried the information with the credit reference agency, who agreed to look into what had happened.

It turned out the credit reference agency had made a mistake. The information related to a different Mr J - but had been incorrectly recorded on Mr J’s file. The credit reference agency apologised, and offered Mr J £1,500 to compensate for the trouble their error had caused.

However, Mr J didn’t feel this was enough to make up for the inconvenience and stress of having to arrange a new mortgage in a rush. He made a complaint - but when the credit reference agency maintained they’d offered enough, the complaint was referred to us.

complaint not upheld
We asked to see details of both the original mortgage and the second one that the broker had found - and carefully compared them. We noted that both mortgages had been offered at a three-year “fixed” interest rate. The effect of the second mortgage’s higher interest rate was that Mr J would pay just over £100 extra over the three years. We also noted that the second mortgage required Mr J to pay an arrangement fee - around £800 - whereas the first didn’t.

Even if we applied interest at our usual rate of 8% to the payments Mr J had already made, the compensation offered by the credit reference agency was far more than the total of the fees Mr J had already paid together with the extra payments he would make over the next three years. Excluding the fees and extra payments, we felt the remainder of the compensation on offer was adequate.

We appreciated that losing a mortgage offer - and finding another at such short notice - had been very stressful for Mr J. But we explained to him that we thought the credit reference agency’s offer was fair. We didn’t uphold the complaint.

image: ombudsman news

ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.