Now they know where you live

Refused a mortgage, loan, credit card or even house insurance? Anger is growing at sophisticated credit scoring systems which judge you on your postcode, type of house, age, occupation and even your flatmate's history of paying bills.

This week a fringe meeting at the Labour Party conference heard how millions of people are denied access to new financial products and called for credit scoring guidelines to be reformed and made mandatory. The Office of Fair Trading is also conducting an investigation into how companies use credit scoring guidelines and promises action if it finds evidence of abuse.

"Red-lining" - the practice of refusing someone a financial product simply because of their postcode - is prohibited by the Office of Fair Trading because it can be used as a cover for discriminating on racial grounds. But the OFT says it currently has no evidence of "red-lining" going on in the UK.

But a report out this week from Ludgate Public Affairs reveals that the OFT's confidence may be misplaced. LPA rang eight direct call centres and was rejected by two. "One of these would not offer full cover because of the post code, suggesting that 'red-lining' is still with us," says report author Jason Evans.

How companies go about scoring you for credit purposes is shrouded in secrecy. Many individuals believe that a yes or no depends entirely on the result of a check with a credit reference agency.

Not so. The credit reference agency supplies companies with extensive details of your credit record, but it is up to the company how it scores you according to this information.

A piece of information from a credit reference agency that gives you a negative score at one company may be disregarded by another company.

The first key piece of information that a credit reference agency (usually Equifax or Experian) gives is your electoral roll name and address. If these are different from the details you give to the loan company you are likely to start off with a negative score.

Job-hoppers, especially common in the IT and media industries, may therefore find themselves excluded from credit because they haven't notified change of address to the electoral roll register.

The next hurdle is the details of existing loan agreements and historical information on repayment patterns held on the credit reference. Any record of late payment or failure to pay will knock points off your credit score.

Thirdly, the credit reference will notify the lender of any County Court Judgments. Nearly all mainstream lenders will decline you credit if it is notified about a CCJ. Finally, the reference informs the lender of the credit position of other individuals living at the same address.

Contrary to popular belief, the credit record of an indebted flat-mate can still be used to deny you a loan or a credit card. The Data Protection Registrar served enforcement notices against the credit reference agencies in 1990 to prevent the use of third-party information, but the agencies successfully appealed and can search against all names at the address you give.

Making matters worse is the anonymous census-based information on your postcode neighbours, which is used by some lenders in addition to the credit reference. The data will include type of housing, composition of household, age of resident, occupation and incidence of CCJs in the area.

This allows a lender to classify a postcode (generally covering no more than 10-15 addresses) as high-risk or low-risk.

Lenders say the use of credit scoring is essential if they are to accurately identify risk. Tim Sweeney, director general of the British Bankers Association, adds: "The effect of credit scoring has been to greatly expand the number of people who obtain credit. It's a much more objective system than the old system where you may not get a loan because the bank manager didn't like the look of you."

Lenders also say that postcode fears are exaggerated, claiming that the postcode accounts for just 5-10% of the total credit score.

Yet if you are one of the people the systems rejects, the consequences are becoming more and more severe. Mr Evans highlights how someone refused a current account or a credit card is denied access to a wider range of products and services. "Utility companies offer big discounts to those who pay by direct debit. Those who cannot pay this way or by cheque may be forced to have a pre-payment meter, in some cases boosting costs by 90%."

Future borrowing is difficult if an individual cannot build a credit record, forcing families into the clutches ofloan sharks because they have nowhere else to turn.

• You can obtain a copy of your credit reference by sending a postal order for £2 to Equifax Europe plc, including addresses for previous six years to: Dept 11E, PO box 3001, Glasgow G81 2DT. Ludgate Public Affairs report, Tackling Social Exclusion in Financial Services: Credit Scoring, is available on www.ludgate.co.uk/archive