Credit wherever credit is due...

Living on credit may have become a way of life for many. But it can never be taken for granted. Miss a couple of mortgage payments, forget to pay off that loan on the car, and you could find your next application for credit unexpectedly refused. But finding out precisely why you have been turned down has never been easy.

Now, under pressure from the Office of Fair Trading and the Data Protection Registrar, there are guidelines, endorsed by all the major organisations in the credit industry. The Guide to Credit Scoring 2000, produced at the end of March, is slowly making itself felt, offering the prospect of a better deal for people turned down for credit.

Anthony Sharp, chairman of the Money Advice Liaison Group, admits that those refused credit are not always treated as helpfully as they might be. 'The credit industry has been pretty poor in dealing with cases where applications have been turned down.'

However, he says, there are important differences between the new guidelines and the previous ones. 'Whereas the 1993 guidelines suggested that credit grantors should give reasons when turning down an applicant for credit, the new guide says that they will give one or a number of reasons,' he says.

According to David Smith of the Finance and Leasing Association, the guide places specific responsibilities on those in the credit industry to be more open in explaining adverse decisions. He says that not only will customers be told they have been refused credit because they have not reached the credit score target, or because of something adverse on their credit reference agency file, but, where it is relevant, they will also be given a specific reason for their rejection. For example, he says: 'Where a customer is refused credit because a large mortgage means they are already fully financially committed, they will be told that that is the reason.'

However, Sharp admits that although greater transparency is generally a good thing, it can also have its dangers. He says the move to greater openness risks more fraud. And for that reason 'the industry shouldn't and mustn't go into tremendous depth when explaining decisions'. Although the guidelines are not law, he says the commitments made by the industry in dealing with applicants refused credit 'come as close to a right as you can get'.

But Jane Guy of the Money Advice Association is dubious about the need for greater openness. 'Some decisions will be bad decisions,' she says, 'but the majority are fair and reasonable.' For example: 'Changes in circumstances, such as separation, divorce and bereavement, are often probably sound reasons for declining loans.'

She suggests people consider seeking advice before applying for credit. 'They can then see why it is likely they would be rejected.' For example, an 18-year-old who asks for a loan of £500 is likely to be accepted, but anyone over 25 who has never had credit before is likely to be refused.

Guy says: 'Because they are not often challenged, it is rare for credit grantors to overturn decisions.' But occasionally this happens. Guy recalls the case of a single mother with two children who was in full-time work. She had been refused a personal loan because the lender felt that, as someone without childcare support, she would not be a reliable worker. 'The Money Advice Association took evidence of her work and sickness record to the lender, and they overturned the decision,' she says.

Carol Hufton, senior compliance manager at the Office of the Data Protection Registrar, says she has never known a case of a person being given a detailed explanation of why their application was turned down.

'Decisions are often made on an amalgamation of factors,' she says. And although she admits that not having the right to detailed reasons can be a source of great frustration for people, and though she often sympathises with the predicaments of individuals, she says she can usually understand why the decision was made. 'Without trying to defend decisions made by credit grantors, credit isn't a right, and there is no legal right to know why you have been refused.'

Lloyds TSB says that although the bank has signed up to the new guidelines, and committed to its policies, it is wary of providing customers with too much detailed information: 'There is a fine line between providing more information on decisions and playing into the hands of fraudsters.'

The bank produces its own guide to credit scoring, and encourages customers who are experiencing difficulties to come in to talk. The spokesperson says that where credit is refused because of something adverse on a credit rating agency, the bank will advise the customer on how to obtain that information. And where someone has failed to meet the target credit score, 'although they won't be given detailed reasons, they may be given hints - such as the fact that they have had 10 cheques returned unpaid in recent months'.

The spokesperson adds that Lloyds TSB will also inform customers if a person is turned down because of the bank's lending policies. For example, if it were the bank's policy not to lend to people over the age of 70, or not to offer a personal loan of less than £500, individuals not meeting these criteria would be told. But whether such sentiments really represent the prospect of greater openness for those refused credit is still unclear. 'We will just have to see how it goes,' says Sharp.