Borrowers set to struggle as the banks raise the bar

Life is getting harder for those who dice with debt as lenders find new ways of vetting applicants. Laura Howard and Julian Knight report

Having an A1 credit rating has never been more important. Nervy lenders, struggling to raise cash for mortgages, loans and credit cards on the international money markets, are steering clear of taking on customers who show signs of being financially overstretched.

"This is the year that borrowers are going to wake up to the importance of their credit file," says Neil Munroe, external affairs manager at Equifax, a credit reference agency used by lenders. "Quite simply, money is going to become harder to get hold of. Consumers without a decent credit score could be in for a bumpy ride."

Among the first in the firing line will be the estimated 1.8 million homeowners coming off low fixed-rate mortgages this spring. Those with imperfect credit histories may struggle to switch to a competitive deal.

What's more, changes being made in the way credit records are compiled will make it harder than ever for consumers who are struggling with debt to obtain further loans.

In short, the amount of information that lenders will be able to see before they decide whether to accept or refuse a prospective borrower is about to increase. This in turn could allow prime customers to be cherry-picked more easily, leaving the remainder saddled with poor deals at punitive rates of interest, or refused credit altogether.

Crucially this year, for the first time, information relating to student loans will be incorporated into people's credit files. Missed payments to the student loan company will show up on the "credit worthiness" radar although the Government has not yet confirmed exactly when it will hand its loan default information to the credit reference agencies.

"Students leave university with around 17,500 in debt," says James Jones, spokesman for credit reference agency Experian. "This is important information for lenders to have in order that they can lend responsibly."

Mr Munroe at Equifax reckons that "a few thousand people" will see their credit scores fall as a result of information from student loans being incorporated into their credit files.

"Student loan defaults do not seem to be a big problem but some will see their scores adversely affected."

At this stage the Government is planning to release the details of defaulters only. This, according to Mr Munroe, will mean that information that could have had the effect of boosting people's credit scores in other words, a history of making their student loan repayments on time will not be available.

"Hopefully, at some point in the future, we will see this information released," says Mr Munroe. "It could help a lot of people with slight credit histories to obtain a higher [credit] score."

In addition to student loan data becoming available, lenders are starting to share information in order to reduce the chances of taking on bad debt. Fourteen credit card providers have signed an agreement to make individuals' "behavioural data" available to all three of the UK's credit reference agencies. Four of the 14 are already sharing data and the remainder are expected to follow shortly.

Mr Munroe explains: "This means that whichever credit reference bureau a lender uses, they will see the same [negative] 'behavioural' information such as taking out cash on one credit card to pay the minimum on another.

"We have learned from past suicide cases the behaviour of people whose borrowing has taken them to the edge. Data sharing will give credit card providers access to this kind of information and will prevent them from lending further in these types of cases."

Consumers looking to check their credit worthiness can write to Experian or Equifax and ask for a copy of their record to be posted at a cost of 2 a time. Alternatively, they can sign up online for regular updates.