Old and young people, migrants and students are too often invisible to lenders, making them more vulnerable in the Covid-19 economy.
Demos’ annual Good Credit Index explores access to affordable credit around the country. Credit is a part of daily life for both affluent and poor citizens. The need for credit among those who are less well-off is not necessarily a consequence of overspending, but often what Citizens Advice calls ‘negative budgets’, where more goes out in bills than you receive in income each month.
The Good Credit Index found that people living in different local authorities, boroughs, or even different streets can have differential access to the credit they need – due to varying credit scores and high streets. For example, post-industrial towns tend to have high credit need but low average credit scores, which limits the credit options available to residents. On the high street, people will frequently encounter payday lenders, pawnbrokers and rent-to-own shops, which risk sending them into spiraling debt.
Cities often score better on our Index, with a larger variety of credit options including more affordable lenders. However, our analysis of data from credit-reference agency Experian shows that various cities have large populations of credit invisibles: people with no credit score due to a thin or non-existent credit report. This group, consisting of young people, older people, the financially excluded, recent migrants and the financially struggling, will often be unable to access any of the credit options around them. In the looming economic crisis, many of them might need a loan, but will be excluded from accessing affordable credit.
The number of people in this situation is significant, 5.8 million people in the UK. Both in Bristol and Birmingham, 9% of the population is invisible to credit rating agencies and in London this is 6%, rising to 12% in certain constituencies. Birmingham has one of the highest rates of thin files in England. Except Northfield, all constituencies in Birmingham score higher than the average rate of thin files per constituency (7%) in England.
The causes of credit invisibility, much like the causes of financial exclusion, are often very complex and difficult to disentangle. Many factors such as age, income, migration status and location are found to play a role in access to credit. Areas with a high student population will often have high rates of credit invisibility, such as Selly Oak in Birmingham . Young people are generally more likely to be invisible to lenders, and in Birmingham under 25 year olds account for nearly 40% of the population. Migrants often have thin credit files, but will also likely be unable to access other vital financial services, with refugees who are granted asylum struggling to open bank accounts. Causes of financial exclusion, such as migration status, poverty, and ethnicity, often overlap to create more entrenched financial disadvantage.
Specific policy solutions and industry approaches are needed to support credit invisibles, but there is no ‘one size fits all’ solution. Any policy or programme aiming to help this group must first understand the specific causes of thin credit files, and the circumstances of those who have them. A student in Bristol whose family can pay her tuition might not suffer from her lack of access to credit, while a refugee who was recently granted asylum and moved to London will need more than just access to a loan to become financially stable.
Recent developments have enabled credit reference agencies to take additional forms of data into account where applicants have a thin file, such as rent and council tax payments or HMRC data. Fair4All Finance is working to better understand the risks and benefits associated with additional data sharing in the affordable credit market, including the impact that bringing in new data sources will have on financial inclusion and wellbeing of this group.
The consequences of having a thin credit file depend not only on your personal circumstances, but on where you live as well. The Good Credit Index shows just how much your geographical location can influence your ability to access affordable credit and avoid bad credit options that can lead to spiralling debt. The Index offers increased insight into the credit environment that people around the country face, which should guide any new policy that aims to increase the financial health of the population.
However, more research is urgently needed to understand the complex and differential needs of credit invisibles specifically, and to support them in accessing financial services. With the financial vulnerability created by Covid-19, it is vital that the government’s anticipated No Interest Loan Scheme is open to those without credit scores. Any policy solution which overlooks this group wouldn’t truly be inclusive.