Looking for a mortgage? Don't try too hard or you'll be blacklisted

Paul Arley thought he was being a responsible consumer by shopping around for his mortgage. Yet instead of finding the best interest rate available, he found himself labelled a credit liability and was rejected by every lender he approached.

'It was a nightmare,' Arley said. 'I was left with the choice of having to go to a special company that deals with high-risk cases, for two-and-a-half-times above the going rate, or putting off buying a house for a year or more.'

Arley had never defaulted on a bill or payment, had never had a county court judgment against him over debt, nor even borrowed large sums. On the contrary, he appeared an ideal candidate for a loan: he had worked in the same, well-paid IT job for five years and had lived in the same house for four years.

Yet despite decades of unblemished financial history, Arley later found he had wrecked his credit history in a single day when he sat at his home computer and searched for a mortgage.

'Every website I visited boasted it could tell me in minutes what mortgage it could give me,' he said. 'I asked six banks for an "agreement in principle", clicked the button that said credit searches would be completed, and in under an hour thought I knew exactly how much I had to spend.'

A month later, Arley had found the house of his dreams. He returned to one of the six banks - and was refused a loan. 'I was carrying the print-out I'd made of the "agreement in principle" they'd given me, but they said it was no longer valid,' he said.

'They said I had become a high-risk customer and they wanted nothing to do with me. They couldn't tell me why.'

Confused, Arley paid a mortgage broker to find out what had gone wrong, and found that searches made by each of the six banks had left so-called 'footprints' on his credit history that, in the eyes of the lenders, made him look like a fraudster, debtor or just a risky consumer.

Each one of us has a credit history listing every major financial transaction we make, including every bank account we have ever opened, every credit card we carry and every loan or mobile phone we seek, including any interest-free credit.

It lists every late payment we make, every county court judgment, every bill we default on and every address we have ever had.

Lenders look at this record when deciding whether to grant a loan. Instead of examining it in detail, however, they just count the number of similar searches logged on the file, and decide if it's normal, abnormal or borderline.

The industry admits there is a problem in the way checks are made with agencies such as Experian, Equifax and Callcredit. 'It's an incredibly rough science,' said Michael Coogan, head of the Council of Mortgage Lenders. 'It really is as unsubtle as using the number of checks other lenders have made.'

Credit histories do not record whether a lender's search resulted in a loan being granted. 'If the number of searches made on the individual is judged by the computer to be abnormal, the request is simply refused,' said Coogan. 'The fact a search took place is seen as a potential sign that fraud is taking place,or the customer is racking up debt.'

Each lender makes its own decision about how many searches are normal or abnormal, but it is considered highly unusual for more than five to be carried out on one person over a year.

According to Kevin Punton, chief director of the Property Plus Mortgage Centre, who has been in the industry for 29 years, the number of victims is soaring.

'Around 15 per cent of the buyers I see had their credit scores seriously damaged by legitimate checks,' he said. 'I've seen more victims in the last 12 months than in the rest of my experience, and numbers seem to be still rising.'

Although credit histories are usually searched by lenders only for activities in the previous six months, information can remain on file for six years.

'I've frequently had to advise clients to give up all hope of buying a house for a year or so until their credit history has settled down,' said Punton. 'I tell them not to apply for a single product where credit has to be given.'

The problem has increased since banks began pushing mortgage offers on the internet. 'People can sit at home and rack up half a dozen checks in a single day,' said Punton. 'The notice that a check will take place is in the small print, but people don't know the implications.'

The number of victims seeking help from Citizens' Advice Bureaux is rising. 'This is something I've been worried about for some time and have become increasingly concerned about recently,' said Teresa Perchard, the CAB policy director.

'So many different deals are offered by lenders now that responsible consumers are shopping around - and are being penalised for their trouble,' she said. 'There need to be far more safeguards.'

The Government is attempting to address the issue: the Consumer Credit Act is being reviewed, and a debt taskforce is looking at lenders' responsibilities.

But the Financial Services Authority, which will take responsibility for mortgage regulation in October, admits there is no statutory power to compel lenders to limit searches. 'The law won't let us specify how and when lenders makefinancial decisions,' said the FSA's Kate Bristow.

Jill Stephens, Experian's consumer relations director, is so concerned that she is about to remind lenders when full searches should be made. Every lender knew searches shouldn't be done without a consumer's informed consent, yet 'it's still going on', she said.

'The only way to eradicate the problem is for every member of the public to be made fully aware of the dangers of searches, but I can't see that happening. It's a serious, growing problem.'

When to beware a credit search

Applying for any non pay-as-you-go mobile phone.

Opening a current account.

Obtaining an "agreement in principle" for a mortgage.

Any interest-free credit agreement, including 'white goods' such as dishwashers, plus stereos and furniture.

Applying to a rental company for a property.