Credit is being rebranded as a means to achieving a certain lifestyle, breeding a culture of convenience and impulse purchasing. And banks are encouraging customers to worry about paying for it later… This comes as retailers use credit as an additional source of short-term profit without properly informing consumers of the potential health warnings that come with extensive borrowing. The rise in advertising the accessibility of credit on social media is concerning, especially among young consumers. This generation are facing more debt issues in the future if their borrowing isn’t properly managed.

Personal debt

The lack of control over personal debt could easily spiral. An absence of detailed affordability checks may lead to a failure to repay your loan. Many consumers don’t realise how negatively this impacts their credit score and ability to get credit in the future.

Some stringent regulation has been implemented to help curb spiralling debt traps from payday lenders. But the retail lending market needs tougher rules in place to ensure that products are only sold to those who are able to afford them, and able to make repayments in a sustainable way. This will help customers build up their financial resilience. More needs to be done to reduce the temptation to spend, to keep up with an instantaneous, on-demand lifestyle that’s unsustainable.

More needs to be done to reduce the temptation to spend, to keep up with an instantaneous, on-demand lifestyle that’s unsustainable.

Credit scores

Contributing to the problem is a lack of understanding of the importance and detail in a credit check, and the impact it can have on personal finance. According to a report by Which? 4 in 10 people have never checked their credit report, mistakenly thinking they would be charged, and often misunderstanding how the reports are compiled and used. Customers are not in touch with their credit scores, which are often inaccurate or contain misinformation, and therefore have the potential to harm future credit applications and other financial products.

More needs to be done by credit bureaus to improve the quality and accessibility of the information in credit reports. Demystifying the purpose of credit and helping customers on a journey to better financial health should be the priority.

Fintechs and other startups have begun to leverage alternative forms of data and artificial intelligence in loan decisions. This has the ability to significantly improve the accuracy of the data collected and also increase the credit market to those who don’t normally qualify. Businesses have started exploring non-traditional means of data including payment history for utility bills, rental payments and smartphone data, to determine the creditworthiness of those without a traditional credit history.

Such new credit checking methods could help to overcome the potential damages of both payday lenders and irresponsible cheap credit from high street retailers and therefore help to stall the ever-rising mountain of debt.

How is data helping?

Lenddo uses machine learning to turn personal data into a credit score which banks and other lenders can use, bypassing the need for a historical credit score through its own scoring system, based on social data. Salary Finance is a digital platform providing employees with an advance on their salary using the company’s payroll, to help avoid the payday loan trap. The startup’s objective is to undercut traditional unsecured lenders by offering affordable loans while also providing financial education, in a means to improving the financial wellbeing of their customers.

Privacy remains a concern regarding the use of alternative data in credit checks, with lenders having greater access to consumer data than in the past, potentially leading to more adverse outcomes, e.g. data showing a late electricity bill. Consumers might therefore be evaluated as higher risks than if they had no credit report at all.

Alternative data can give lenders more confidence in their decisions. By enabling a more comprehensive view of the customer, which would expand the availability of credit to those who are usually denied bank accounts, and removing the potential subjectivity that may occur during a credit check in a retail bank.

As traditional high street lenders bear tougher regulation, it’s important that vulnerable customers are given new opportunities to access the appropriate and affordable loans that they need, without being driven to unregulated (and potentially dangerous) loan sharks.

As traditional high street lenders bear tougher regulation, it’s important that vulnerable customers are given new opportunities to access the appropriate and affordable loans that they need, without being driven to unregulated (and potentially dangerous) loan sharks.

In a drive to improve the long-term financial health of the UK, transparency throughout the loan application journey should be a top priority for the credit industry. Customers need to make better-informed decisions in relation to their personal finances. When they understand what APR means, what a credit score is and what the dangers are of getting into debt; saving and developing good financial habits will follow.

Without further support and intervention from regulators and government, the consumer debt crisis will only get worse.

If you missed part one, read it here.