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New CfRC research indicates that some lower-income borrowers are highly sensitive to their credit scores, and this could be negatively impacting their financial behaviours: causing them to prioritise credit repayments over the payment of household bills and other essentials. People in financial difficulty may also be receiving inappropriate messages that encourage them to take on more credit than they can afford.
Over the past year, we have been exploring how sensitivity to credit scores impacts financial behaviours. A first phase of the project –comprising qualitative interviews with thirty low to median income borrowers has now been completed, and a further phase involving a representative survey of around 3,500 of these is planned for later this year.
The interviews indicate that there is a group of people who are highly sensitive to changes in their credit scores. More than two thirds of study participants checked their credit score at least once a month, and a fifth checked their scores weekly or even more frequently. The frequent checking of scores seems to be encouraged by the many e-mails and app notifications that borrowers receive from credit score providers, such as ClearScore, Credit Karma and Experian.
Some participants related closely to their credit scores, with scores impacting their self-esteem. For these participants, scores were a measure of how ‘good’ their financial behaviours and decisions were. This sensitivity to their scores may have a ‘disciplinary effect’: encouraging people to prioritise credit repayments over household bills and essential spending. This is despite severe cost-of-living pressures. Half of the participants had experienced financial difficulties in the past 12 months, and all had an active line of credit. Despite having pared back their spending to the essentials, and some using credit to pay for these on a regular basis, none reported having defaulted on their credit agreements. Arrears on household bills may therefore be a consequence of participants prioritising access to credit, which many saw as vital.
While sensitive to their scores, participants were also aware of problems with the credit reporting system. Just under half had experience of errors in their credit reports: caused by falsely assigned credit accounts, out-of-date information, and fraud. But participants who contacted their providers to correct errors said it had taken a least a month, and sometimes several months, to fix their problems, negatively impacting their imminent credit options.
Participants with a history of debt problems also questioned why past defaults should continue to negatively impact their scores. In most cases, those defaults had occurred because of ‘life events’ (e.g., job loss and ill-health) over which they had no control. Some also reported that they had learned from their previous debt problems and that they were now much more cautious when using credit. In these cases, credit scores might overstate their default risks.
Worryingly, many participants felt that the best way to improve their credit scores was by taking out more credit and using it regularly. Credit score providers have a dual role of being both data handlers and credit brokers, and this may be affecting their messaging. Half of the participants felt credit score providers encouraged them to take on more debt. These often felt that it was inappropriate for credit score providers to act in this way.
While messaging could potentially be improved, the problem may be more fundamental: with credit score providers matching consumers to criteria provided to them by lenders willing to downplay affordability considerations in the search for profitable customers.
Despite welcome FCA action to clarify the rules concerning creditworthiness assessment in 2018, a tension remains between the search for profitable customers and the need to ensure that affordability is properly considered. This will hopefully be an issue that the new Credit Information Governance Body will be willing to explore further.
Finally, the actions of lenders may themselves impact credit scores because requests for forbearance could be turned down, or the type of forbearance offered could fail to sufficiently assist borrowers in financial difficulty. Defaults may be more likely in these circumstances. Further research is needed, but if lender attitudes play a significant role in determining who defaults, then systemic reporting of how lenders respond to requests for help could be beneficial.
The full report is available here, and we welcome stakeholder input regarding its findings. To engage with the project, please contact admin@responsible-credit.org.uk.
