BLOG: Give people some credit

September 20, 2017

Too many Brits still struggle accessing traditional means of credit. In the UK, it’s estimated that six million people have no access to mainstream credit. These people tend to be young and migrant workers, both of which groups tend not to have a credit file. Their financial situation is worsened when they’re forced to turn to payday lenders, whose APRs can typically exceed 1,200%. Others resort to loan sharks, illegal moneylenders who prey on low-income and vulnerable individuals.

Poorer households, older people and those in social housing might have the next best thing: a ‘thin’ credit file which gives insufficient evidence to apply for credit. So, financial exclusion is driven by having no, or a limited, credit file. Other factors are also at play, such as the unrealistic conditions imposed for applying for mainstream credit or the time that finding the best credit deal demands.

A new report published today by the Financial Inclusion Commission and Policy in Practice suggests a way forward. Give people some credit: Overcoming the barriers to mainstream credit with data looks at how new sources of data can help the credit process and ultimately lead to better lending practices for those most vulnerable to financial difficulty. Data helps to verify identity; support creditworthiness through credit scores and increase affordability. Here’s how.

Identification is important. An individual must prove where they live if they want to get credit. At the core of this is stability: a lender needs to be satisfied that a household is stable, and length of time they have lived in one property is a good indicator of this. Other sources of data include housing benefit details; national insurance numbers and, increasingly, social media accounts. An individual who posts regularly on LinkedIn or Facebook is a more reliable borrower than someone with no social network presence.

To give an example, Rental Exchange is a system which incorporates a tenant’s rental payment history into their credit file. Figures show this helps people prove their identity: 84% of social tenants are able to provide identity authentication when rental data is included in their credit file, compared to 39% when it isn’t.

Where data also improves the credit process is creditworthiness itself. Creditworthiness demonstrates a borrower’s probability of repaying their debt, with an interest level charged according to the level of risk on that loan. Data sources that a lender can use include income; history of credit card payments; rental data and council tax payments amongst others.

Using the Rental Exchange example again, over three quarters of social tenants (76%) enjoy an improved credit rating when their rental data is open to credit providers. That’s a significant amount that cannot be ignored if we are to ameliorate the financial circumstances of those who need it most.

Finally, there’s affordability. That is to say, the onus is on the lender to determine whether the borrower can realistically afford to pay back their loan. Data sources can be the same ones used for creditworthiness.

The bottom line is that data is good for both the borrower and the lender. Individuals have access to credit, based on a more accurate depiction of their life situation, which they are more likely to repay. Lenders have increased confidence that the debt will be paid back, and as a result will make better lending decisions.

Across the financial services industry, data is becoming a powerful tool for the consumer. People now have more choice and are better off thanks to the data they provide. The Competition and Markets Authority has just recently enacted its Open Banking initiative, which pushes further sharing of data. It’s complemented by the Cabinet Office’s consultation on data sharing, which all illustrates the government’s objective to be ‘digital by default’. 

The government also has a new website, Gov.uk/verify, which allows individuals quicker access to government services. Crucially, it facilitates more efficient identity verification. It all comes as this report recommends further government action to increase the take-up of data sharing as a means of providing people with better credit.

Legislation will open up data sharing among public bodies and the credit reference industry. Data collection can be carried out locally, such as from a local authority or housing association, or nationally, from Universal Credit. Universal Credit offers the best opportunity to do this, but consumers and lenders also need further convincing of the benefits that come with data sharing, particularly in the face of privacy concerns. With that in mind, the report also stresses the need for opt-outs, so that the public has confidence in the dissemination of their personal information.

What this report shows is the power of data. The statistics I’ve included here are not small increments: they’re compelling figures which demonstrate how poorly serviced some people are in the credit sector, and how the simple sharing of rental payment history can overhaul someone’s finances. Provided the mechanisms are in place to ensure confidentiality, opening up individuals’ data to lenders can only be a good thing.