How the credit industry works

Canary Wharf skylineMillions of us have mortgages, loans and credit cards. But how many of us really understand how the industry behind them works?

Here, we look at the different types of lenders and explain how they operate, are regulated and interact with other companies within the industry such as credit reference agencies. %VIRTUAL-SkimlinksPromo%

Different types of lenders and how they operate
Banks, like all other businesses, exist to make money. And one of the main ways they fill their coffers is by lending out money paid in by savers and current account holders to borrowers at higher rates of interest.

With the best easy-access savings accounts on the market currently paying about 3% and the average credit card having a standard APR in excess of 16%, it's easy to see how they can make big profits - even in a recession.
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They are not the only lenders out there, though. You can also borrow through a building society.

These too exist to make a profit, but are slightly different to banks in that they have members, rather than shareholders.

Then there are credit unions, which are member-owned financial cooperatives that can range from volunteer operations with a handful of members to institutions with millions of pounds worth of assets and many thousands of members.

Those keen to avoid traditional lenders can also borrow through the Zopa lending exchange. Its loans are financed by consumers willing to risk lending to individuals to beat the returns currently on offer from savings accounts.

The company has arranged loans worth more than £160 million since its launch in March 2005. Giles Andrews, the cofounder and chief executive of Zopa, said: "Cutting out the banks is not only satisfying, these people are also enjoying much better rates on loans and on their savings by doing so.

"There is vast scope for growth in this new and exciting arena, and we have every intention of taking much bigger bites out of the banks' monopoly on personal loans and savings."

Credit reference agencies and what they do
There are three credit reference agencies in the UK: Experian, Equifax and Callcredit. They make money by holding files that lenders, landlords and sometimes retailers pay to look at when deciding whether or not to accept you as a customer.

Information gathered by the credit reference agencies include your address and repayment history for everything from your gas bill to your mortgage.

Based on this information, they then award you a credit score, which is the main figure that interests the banks and the credit providers.

If it is low, your chances of getting approved for credit are slim, while even if it is mediocre, the best deals are likely to be out of reach.

You can view your file for a small fee if you want to know more or are concerned about your score. Just contact the agencies directly.

Industry regulation and how it is changing
The Office of Fair Trading (OFT) is currently the organisation charged with ensuring that companies in the credit industry treat their customers fairly.

However, consumer credit regulation will be transferred from the OFT to the Financial Conduct Authority (FCA) once the Financial Services Bill - introduced to Parliament last week - becomes law.

Under the new regime, the Financial Ombudsman Service will continue dealing with individual consumer complaints, but consumer groups will make super-complaints about serious issues to the FCA instead of the OFT.

It is hoped that this with improve the regulatory framework protecting consumers who take on credit. Financial Services Authority (FSA) chief executive Hector Sands said: "The FCA will build upon the FSA's proactive consumer protection strategy, launched in March 2010."

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How the credit industry works

The law states that any goods you buy from a UK retailer should be of satisfactory quality, as described, fit for purpose and last a reasonable amount of time.

This applies even if you buy items in a sale or with a discount voucher. You may have to insist on these rights being respected, though.

Useful phrases to use when you want to show you mean business include, "according to the Sale of Goods Act 1979" and, if it's a service, "according to the Supply of Goods and Services Act 1982".

Some shops will allow you to exchange goods without a receipt, but they can refuse to should they wish.

If the goods are faulty, however, another proof of purchase such as a bank statement should work just as well.

If you attempt to return goods within four weeks of the purchase, your chances of getting a full refund are much higher as you can argue that you have not "accepted" them.

After this point, you can only really expect an exchange, repair or part-refund.

The updated Consumer Credit Act states that card companies are jointly and severally liable for credit card purchases of between £100 and £60,260 (whether or not you paid just a deposit or the whole amount on your card).

Anyone spending between these amounts on their credit card is therefore protected if the retailer or service provider goes bust, their online shopping never arrives or the items in question are faulty or not as described.

Start by writing to the agency asking it to either remove or change the entry that you think is wrong. It will investigate the matter and find out whether you have been the victim of ID theft or a bank's mistake.

Within 28 days from receipt of your letter the agency should tell you how the bank has responded. If the bank agrees to change the entry, they will authorise the agency to update their records. They should also send updates to any other credit reference agencies they use.

You can also contact your lender directly to query a mistake. If the lender agrees to the discrepancy, ask them to confirm this in writing on their letterhead and send a copy to the agency, asking them to update your file.

The FOS settles disputes between financial companies such as banks and consumers.

If a financial organisation rejects a complaint you make about its services, you can therefore escalate that complaint to the FOS - as long as you have given the company in question at least eight weeks to respond.

The FOS will then investigate the case, and could force the company to offer you compensation should it see fit.

Bailiffs are allowed to take some of your belongings to sell on to cover certain debts, including unpaid Council Tax and parking fines.

They can, for example, take so-called luxury items such as TVs or games consoles. However, they cannot take essentials such as fridges or clothes.

What's more, they can only generally enter your home to take your stuff if you leave a door or window open or invite them in.

You are therefore within your rights to refuse them access and to ask for related documents such as proof of their identity. If they try to force their way in, you can also call the police to stop them.

Private sector debt collectors do not have the same powers as bailiffs, whatever they tell you.

They cannot, for example, enter your home and take your possessions in lieu of payment.

In fact, they can only write, phone, or visit your home to talk to you about paying back the debt. As with bailiffs, you can also call the police if you feel physically threatened.

Thanks to the Distance Selling Regulations, you actually have more rights buying online or by phone than on the High Street.

You can, for example, send most goods back within a week, for a full refund (including outward delivery costs), even if there's no fault.

You will usually need to pay for the return delivery, though. The seller must then refund you within 30 days.

We enter into contracts all the time, whether it be to join a gym, switch energy supplier or take out a loan.

In most cases, once you've signed a contract, you are legally bound by it. In some situations, however, you have the right to cancel it within a certain timeframe.

Credit agreements, for example, can be cancelled within 14 days. And online retailers must tell you about your cancellation rights for any contract made up to stand up legally.

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