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 / <strong>December</strong> <strong>2023</strong> / PAGE 28
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. Brave | Curious | Resilient / www.cicm.com / <strong>December</strong> <strong>2023</strong> / PAGE 29 continues on page 30 >
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