Under-served and overlooked: why credit report data must change
By Charlotte McNicholas, Partnerships ManagerMay 19th 2022
TotallyMoney’s report with PwC found there’s 20.2 million financially ‘under-served’ UK adults, a number that has increased by 50% in the past six years. This means that one in three adults may have difficulty accessing credit from mainstream lenders.
As it stands, lenders primarily refer to a customer's credit report when assessing their affordability, ultimately making a lending decision based on this data. However, this process, and the data collected, remains largely unchanged since the 1970s and there’s a real risk it doesn’t fairly represent someone’s creditworthiness in 2022.
To make sure that the under-served population doesn’t continue to grow, the credit reference agencies (CRAs) must catch up with the changing economic and social landscapes. This needs to happen quickly — we found that 8.9 million UK adults are “financially fragile” and at risk of joining the under-served population.
Growing cases of thin-file customers
Our research also found a 29% increase in the number of people with no credit history in the last six years. According to the Woolard Review, access to credit depends, in part, on ‘the availability and quality of credit information to allow lenders to assess consumers’ creditworthiness’.
Without exploring new data sources to include in credit reports, this number is likely to increase and force more people into the ‘under-served’ category.
One area that has seen significant change is in homeownership, which has dropped by 55% for 16-24 year olds since the 1980’s. This growing population with no mortgage repayments being reported to the bureaus has been termed ‘generation rent’.
However, as rental payments are not by default automatically reported to CRAs, that means most renters might not have the same “file thickness” as a mortgage customer, missing out on the credit score benefits associated with regular repayment history.
Another considerable change to financial behaviour is Buy Now Pay Later services being used as an alternative to traditional credit. TransUnion recognised that this created a blind spot in credit report data and were the first CRA to announce that they would be reporting on BNPL data in its credit files later this year.
This will be especially beneficial to the customers who lack credit history. By demonstrating positive repayment behaviour, lenders may view the individuals more favourably, helping to drive both financial transparency and inclusion.
New opportunities with open banking
In addition to reporting on data that recognises people’s evolving lives, an opportunity to use open banking data has arisen. This means, with customer consent, lenders are able to access banking data, allowing for more accurate lending decisions and potentially opening up borrowing for those who are currently overlooked and under-served by the industry.
We’re introducing this to our app through our partnership with Bud, and customers will begin to see this across TotallyMoney as we continue on our goal to open up the credit market.
Not only does open banking data give lenders a broader view of an individual’s behaviour, it also gives an up-to-date view. Our financial lives have been impacted significantly over the past two years. With no indication that this volatility is going to subside, decisioning on real-time data is crucial in ensuring both agile and responsible lending.
With almost 10 million on the cusp of joining the financially under-served category, it’s crucial the industry acts now by augmenting credit reports with additional data sources, in order to address the systemic issues of an outdated institution and to help everyone move their finances forward.