The Irish Credit Bureau guarantees that ignoring those threatening letters from the banks will catch up with you when you go for that important big loan, writes Laura Slattery

Customers of financial institutions can have long memories as far as bad service is concerned, but banks have the upper hand when it comes to keeping track of mistakes.

Not only do banks keep a record of our custom with them as far back as the day we first walked into one of their branches, but they can also check how good or bad we have been behaving for their competitors.

There are currently 42 members of the Irish Credit Bureau (ICB), a credit referencing agency that stores details of credit contracts and payment histories for every loan, every customer.

The aim of the ICB is to assist the lowering of the cost of credit, enabling faster approvals and helping avoid over-indebtedness. So is the system fair to consumers?

The history of a credit agreement is kept on file for five years before it is wiped from the record.

This is shorter than in some countries, but still long enough for someone who has performed a financial turnaround to be haunted by a debt-laden past.

For example, penniless students, roaming from address to address at a faster pace than the postal service can keep up with, missing a few monthly repayments might seem like a trivial matter. But if they ignore those threatening letters from the bank, their credit status could be damaged.

A couple of years later, one such student, now a high-earning graduate, may try to secure a mortgage. Potential lenders, pointing to the black mark next to the person's name, may decide that he or she is still a credit risk and reject their application.

In fact, there is nothing as crude as black marks in customers' credit records, nor is there any red ink advising financial institutions "do not lend money to this person, they will probably run off to Barbados never to be seen or heard from again".

Instead, the ICB works as an "electronic library", presenting the repayment information submitted by individual credit providers in order for other member credit providers to interpret how they see fit. They will then apply their own credit scoring system.

Credit reference reports contain repayment information on personal loans, motor loans, mortgages, leasing contracts and hire purchase agreements.

They don't include information on credit union loans, as the credit unions are not members of the ICB.

Keeping a consistently massive outstanding balance on a credit card won't show up, but if someone is in so much card-related debt, that part of it has to be written off and the card is revoked, then the credit card provider can add this to the report.

Only overdrafts that are the subject of legal proceedings are added to the report.

A payment profile shows a series of numbers indicating how many times and by how many number of payments the borrower went into arrears.

A letter denotes the eventual status of the account. For example, the letter "C" means the loan was cleared.

A "P" means those threatening letters have been sent and litigation is pending.

Other ominous letters include "R", which stands for repossession of goods, and a "W", which indicates that the lender's debt collection agency gave up and the lender eventually had to write some of the loan off.

A "B" means the borrower cannot be located by the lender and could well be in Barbados for all it knows.

According to Mr Séamus Ó Tighearnaigh, chief executive of the ICB, lenders adopt varying attitudes to a person's credit history.

Some don't mind if a borrower has a slightly erratic approach to repayments on their way to settling a loan, while others prefer to deal with people who are "thoroughly disciplined".

The important thing for borrowers is not to do "the ostrich thing" and run away, Mr Ó Tighearnaigh says.

"Take a student who has failed their exams, left college and found it hard to get a job. If they have a couple of loans in bad order, they should go to the bank and say 'I'm in difficulty'," he explains.

The bank may then put a moratorium on the loan until the borrower can get a job and afford the repayments.

This looks a lot better on a credit reference than a head-in-the-sand default on a loan.

Something else borrowers can do is add up to 200 words to their own credit report explaining why a loan was not repaid or was repaid late.

Mr Ó Tighearnaigh says explanations like "my wife died of cancer, I had to resign from my job to mind the family" have been included.

But, in general, leaving a €1,000 outstanding personal loan to fester while you're busy travelling the world could scupper your chances of being approved for a mortgage during the next five years.

Lenders will always check a person's credit record when assessing a mortgage application, according to Ms Sarah Wellband, associate director of REA Mortgage Services, although they will be sympathetic to unexpected blips.

"If the arrears were minor - no more than three payments missed and due to isolated problems, illness, redundancy, bereavement - the mortgage will normally be approved," she says.

Each case is looked at on an individual basis, Ms Wellband adds. "The big no-no is if someone says they fell out with an institution and refused to pay them; the lender is left wondering if the borrower might fall out with them too!"

Mr Graham Brierton, a director at intermediary Ezhome, says credit history is important no matter how high an income a person has or how good a customer a person seems.

Lenders will take exceptional circumstances into account, he agrees.

"If you were trying to take out a mortgage with Permanent TSB now and two years ago you defaulted on a loan with Bank of Ireland, Permanent TSB will come back to you and give you the opportunity to explain why you defaulted, they won't just discount you," he says.

Credit checks are not 100 per cent accurate, adds Mr Brierton. "It has been known for them to be inaccurate or out of date."

Someone with no credit history who wants to start their borrowing career in at the deep end with a €150,000 mortgage may face resistance.

Although lack of credit history is not as big an issue here as in the US, people trying to obtain their first line of credit can still sometimes find that no lender wants to be the first to take a chance on them.

"If someone who is 38 years of age wants to borrow and they say it's the first time in their life that they have borrowed, bank managers are probably left scratching themselves, thinking

"'I've no proof that this person has the discipline to make monthly repayments. Do I really want to be the person who takes on this virgin borrower?'" says Mr Ó Tighearnaigh.

"All things being equal, if there are two 38-year-olds and one of them has a credit history and it's perfect and the other one has no credit history at all, common sense tells you which one the banks will prefer to lend to."