Consumers penalised for seeking best loan rates, MPs told

As part of their investigation into the issue the Treasury Select Committee was told people who make several attempts to get a deal for a loan or credit card could hurt their credit score.

Banks and building societies are increasingly using so-called risk-based pricing, whereby rates are tailored to an individual borrower's circumstances.

But this means the consumer will only find out what the price is after a credit check has been completed and each search could be logged on a person's credit file, potentially giving other lenders the impression they have applied for many products and been rejected.

Representatives from the industry said the record of multiple loan applications - rather than just successful deals - enabled firms to flag up issues such as high indebtedness or fraud.

But Martin Lewis, of Moneysavingexpert.com, told the panel that some consumers were forced into making several applications after finding they were not eligible for lenders' advertised rates.

He submitted case studies to the committee which included a consumer who said they had applied for a loan at a rate of 9%, but were actually offered one for 30%.

This he argued contributed to customers declining to take up one loan and applying for others, but by doing so he said their credit rating might be affected.

"The system is designed to stop shopping around at the detriment of consumer choice," he said.

Toby Van der Meer, a director at moneysupermarket.com, said his organisation had conducted a survey, which suggested that many people did not know that multiple applications could have a detrimental effect on their credit rating.

Mr Van der Meer said of the respondents 17% said they completed multiple applications, while 46% did not know that the practice could harm their credit. This rose to 61% among lower income groups.

Both Mr Van der Meer and Mr Lewis said the use of so-called 'quotation searches', which do not leave a footprint should be more widely used in the industry before full applications are made.

The committee heard from industry members that legislation requires lenders to advertise an APR rate that 66% of those taking up the deal will be able to receive.

The remaining customers - a third of those taking up the loan - were potentially paying a higher rate.

Eric Leenders, executive director of retail at the British Bankers' Association (BBA), said he did not recognise the gaps between advertised rates and those eventually offered that were cited by Mr Lewis.

He said the percentage of applicants potentially affected without their knowledge by multiple applications would be "very very small" and added that there were other factors involved in firms' assessments of credit worthiness.

The committee appeared frustrated that none of the witnesses was able to provide them with solid data on the numbers of people potentially affected by the practice of recording multiple applications and asked the BBA to return to them with figures.

It was suggested that perhaps 1% of those applying for a loan could be adversely affected, but a member of the committee said this could still translate as "quite a lot of people".

Fiona Hoyle, head of consumer finance and fraud at the Finance and Leasing Association, said organisations recognised that consumers were shopping around more and would now allow up to eight applications in a three-month period.

Not all lenders use the sorts of checks that would show up on a credit report.

Nationwide for example has a policy of only doing the softer touch surveys, while Barclaycard enables people to find out if they would qualify for one of its cards without having to make a full application.