CM December 2023

CONSUMER CREDIT
The scores are in
And the current credit scoring system is failing people.
AUTHOR – Emma Steeley
THE cost of living crisis
continues to squeeze
households up and down
the country. While UK
inflation may have steadied
at 6.7 percent in recent
weeks, consumer wallets remain under
pressure as prices of goods and services
continue to rise. In fact, 93 percent of
people in the UK reported their cost of
living had increased compared with a year
ago, and 14.2 million households consider
their financial situation to be worse than
pre-pandemic times.
What is clear is people need credit now
more than ever before. Having access to
credit allows businesses and individuals
the flexibility to cover an unexpected cost,
smooth out cashflow or help them plan
their spending to support a big purchase,
such as buying a house.
Credit scoring systems and the
broader financial infrastructure have
undoubtedly served the majority of
people well, providing a standardised way
to assess creditworthiness and enable
access to lending facilities. However, as
homeownership becomes increasingly
out of reach for many, it is essential that
the credit industry adapts and evolves.
As demand for credit has increased,
cracks in the lending system have revealed
themselves, seeing many locked out of
loans for arbitrary reasons. Research
shows, since the pandemic, 65 percent of
first time buyers have been unsuccessful
in securing a mortgage, with the most
common reason being a poor credit
history.
While we can place blame somewhat
on the state of the economy, this shouldn’t
act as a smokescreen for systematic flaws
in the current lending market. When it
comes to finance, there’s no one-sizefits
all solution given everyone’s cash
flow, spending habits and lifestyles are
different. But currently, old fashioned
credit models do not accurately represent
the full view of an individual’s credit
history, and they are failing millions
of credit worthy people. All too often,
people who can actually afford credit, are
discounted at the very first stage of the
application process.
To increase accessibility and provide
individuals with more tailored credit
solutions that truly meet their needs,
lenders need to understand borrowers
and this begins with leveraging more
comprehensive and real-time financial
Emma Steeley
– CEO at Aro.
While we can place
blame somewhat
on the state of
the economy, this
shouldn’t act as a
smokescreen for
systematic flaws in
the current lending
market.
data about them. This will enable lenders
to assess and build a more accurate
picture of a individuals’ creditworthiness.
The pitfalls of current credit
scoring models
From a creditworthiness point of view,
bureau data is reliable. It tells lenders
who has a good credit score, who has little
to no debt and who has the longest credit
history. While these are all important
factors, bureau data isn’t enough in today’s
digital world. With more data available on
individuals, it’s vital it’s made use of to
make better data-driven decisions.
In addition, some traditional
underwriting still relies on one-sizefits-all
calculations and unintentional
bias assumptions around an individual’s
lending ability based on their gender or
address. This not only excludes thousands
of people from the world of finance,
but it can inadvertently perpetuate
socioeconomic disparities.
What’s more, certain negative circumstances
that are reflected in an individual’s
credit score can unduly leave them
locked out of accessing credit. A single
financial misstep can lead to a significant
decrease in a credit score. For instance, a
late repayment can have a long-lasting impact
on someone’s creditworthiness, even
after they have significantly improved
their financial habits.
Ultimately, the world has moved on
since these models were created, and
bureau data used in isolation without
the full context of a person’s financial
responsibilities, can be harmful to their
ability to access credit or find the right
solution for them. The system hasn’t kept
pace with today’s data-driven world. These
are issues that can be solved if lenders are
embracing the right data sets and seizing
the opportunities of open banking.
The benefits of open banking
Open banking allows individuals to
give permission to temporarily share
information about their finances that
were previously hidden. It’s promised
to transform the industry, but since its
introduction in 2018, uptake has been
slower than expected. However, there is
progress and the number of active open
banking users in the UK reached the
milestone of seven million users earlier
this year – a significant increase on the
five million users at the start of 2022.
While there remains a nervousness
Brave | Curious | Resilient / www.cicm.com / December 2023 / PAGE 28