UK public think credit scores unfair as organisations call for reform of credit information market

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UK public think credit scores unfair as organisations call for reform of credit information market

Seven out of ten (70%) of UK adults believe it’s unfair for someone’s postcode or location to have a negative impact on a credit score, new research reveals today (27 April 2023).

Less than one in six (15%) of adults think that a low credit score should result in higher interest payments for credit, and more than half (55%) of adults think it’s unfair that not having an existing credit history has a negative impact on a credit score.

The research of 2,000 UK adults by Opinium Research comes as a coalition of social purpose lenders including Salad Money highlight how flaws in credit scoring and the traditional credit information market contribute to the "poverty premium," result in poor outcomes for consumers, and harm access to affordable credit.

They are calling for the introduction of an automatic “social credit score” to address the chicken and egg situation whereby 5.8 million “credit invisible” people in the UK can’t get credit at an affordable rate until they have suffered the expense of borrowing from a lender for people with poor credit scores, and typically paying substantially to do so until they have built their credit score.

The concept would mean lenders would assess all applicants on the basis of their actual financial circumstances, and whether or not they can afford a loan. It would expand access to affordable credit and has the potential to be a “win-win” for consumers and the credit industry serving the financially vulnerable.

Currently most lenders rely on a credit score, so someone without one or with a thin file who applies for credit is either:

  • Not assessed as to whether or not they can afford to repay a loan by many lenders.
  • Given an estimated score (based on their post code, among other factors) – so they are judged based on where they live, a less fair metric than their income, expenses, and whether or not they can afford to repay a loan.

Key research findings (source: Opinium Research polling of 2,000 UK adults, weighted to be nationally representative. Fieldwork: 14-18 April 2023).

  • Less than 1 in 6 adults think that a lower credit score should result in higher interest payments for credit.
  • Just 4% of UK adults believe an applicant’s location is an important fact that should be considered by lenders when making a decision about a loan or credit for someone who does not have an existing credit history.
  • More than half (55%) of adults think it’s unfair if not having an existing credit history has a negative impact on a credit score.
  • Around half (46%) of adults think the fairest impact of a lower credit score on borrowing is for the borrower to need to provide more information.
  • 7 out of 10 adults think it’s unfair for postcode or location to have a negative impact on a credit score.

Lord McNicol and Baroness Evans, co-chairs of the Salad Projects Oversight Body which represents the interests of applicants to Salad Money, a community development finance institution and Responsible Finance member, said:

"As they currently operate, credit scores penalise those with the lowest incomes, penalise for-purpose lenders and create the opposite of a “level playing field.” The social credit score would not guarantee automatic acceptance to credit but would mean people automatically progressed to an affordability assessment (which a lender would be obliged to conduct) rather than being rejected simply for having no score. It would present a major opportunity for lenders to serve a massive nascent market which would otherwise usually be denied access to affordable credit just because Credit Reference Agencies (CRAs) do not provide an opening credit score. The social credit score is beneficial for society, borrowers, lenders and CRAs.”

Theodora Hadjimichael, Chief Executive, Responsible Finance, said:

"The Credit Information Market in its current form harms access to affordable credit, contributes to the poverty premium and results in poor consumer outcomes. We must not miss the opportunity to transform the credit information sector to a more inclusive system which better reflects the realities of people’s lives. A social score could give more people access to a fair assessment of their ability to afford credit so would benefit many currently excluded consumers.”

The Financial Conduct Authority acknowledged in its Credit Information Market Study interim report of November 2022 that the traditional approach to credit information doesn’t work well for many under-served and vulnerable consumers. It has previously (within its Woolard review) called for an expansion in community development finance institutions (CDFIs) so people excluded from mainstream credit have better and fairer options available.

CDFIs and Responsible Finance have welcomed the ambition to scale up the community lending sector and the work already underway to support CDFIs. But doing so without reforming the credit information market (and credit scores) will not address the full extent of financial exclusion in the UK, they say.

CDFIs are social purpose lenders which serve some of the most disadvantaged and excluded customers in the UK. While they are only able to lend to 5 to 7% of their applicants (because for many people their circumstances mean they could not afford to borrow or they do not have a credit score), they support customers and applicants they are unable to lend to in many other ways. They give income-boosting, tailored financial support to hundreds of thousands of applicants every year.

The not-for-profit and asset-locked social purpose lenders (CDFIs) backing the social credit score include Fair Finance, Fair for You, Five Lamps, Lancashire Community Finance, Moneyline, Salad Money and Scotcash. CDFIs have a track record of more than two decades in the UK and are proven to build financial resilience and address financial exclusion.

Their paper points out that credit scores serve some (prime and near prime) consumers well, enabling competition and choice in consumer credit markets. But they do not improve the ability for firms to provide affordable loans to under-served customers. More than 10% of customers which one Responsible Finance member has successfully lent to have no credit record or score (yet are successfully repaying their loans), and payment data shows that customers with no score perform no worse than other customers, and are therefore being excluded unnecessarily by other lenders where the absence of a score leads to an automatic rejection.

Furthermore traditional credit information is poor at identifying and mitigating potential vulnerability, and the high costs which social purpose lenders like not-for-profit and asset-locked CDFIs, which serve some of the poorest or most vulnerable households, pay to Credit Reference Agencies harm the sustainability of the CDFI sector and its ability to scale up in line with the recommendations in the FCA’s Woolard Review. 

The proposals come after Responsible Finance and the Salad Projects Oversight Body made submissions to the FCA’s credit information market study.

The proposals, including other tools to support the community development finance sector, were revealed at an event focusing on building financial inclusion at the House of Lords on Weds 26 April and at https://responsiblefinance.org.uk/category/news/ 

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