Creditworthiness is becoming one of the current decades' touchstone issues. But why now?

The credit profiling industry, which has grown up to help banks and building societies decide who they lend to, has inadvertently brought this issue to a head.

In the UK there are thousands of lenders offering credit cards, mortgages and personal loans, as well as millions of credit-backed car leases and mobile phone contracts that are effectively loans too. And whether or not people can access these financial products dictates to a certain extent their lifestyle, and what they can or cannot afford.

Most lenders rely on in-house teams to process credit applications and these in turn use credit reference agencies to find out more about each applicant before making a decision.

In the UK there are three main Credit Reference Agencies (CRAs) that answer thousands of queries from lenders every day. These are Experian - the largest - as well as Equifax and TransUnion.

Creditworthiness has two key political aspects. The first is the issue of the ‘poverty premium’ and how those on limited incomes access financial products and services.

The other is how much creditworthiness affects people who are struggling to get on the property ladder by limiting their ability to access an affordable mortgage.

Poverty premium

Two years ago a new strategy for the UK was published by the Financial Capability Board to help more people manage their money better. Its board members believe that there are “still far too many at risk of falling into serious financial difficulties and failing to get the help they need if they do”.

One of the key reasons for this national strategy has been to address the ‘poverty premium’, which is the extra money that poorer households pay to run their lives including to access financial services, borrow money and heat their homes.

Two key studies have examined this. This includes one by charity Save the Children in 2010 which pegged the extra cost of being poorer at £1,289 per low-income household. A second study by the University of Bristol in 2016 found the premium to be £489. This second study is held to be more robust. It also found that lower-income families spend £55 a more per year on average using higher-cost credit.

To help tackle this, last year Big Issue founder Lord Bird launched a Private Member’s Bill in parliament that if successful will require lenders to add council tax as well as rent to the list of payments lenders should consider when making a lending decision. It made it through the Lords and is now making steady progress through the Commons.

Ownership frustrated

There are an estimated 11 million tenants in the UK living in five million rented homes, a quarter of which are families with children. The number of households who rent is due to rise by 2021 to 5.79 million and will by then make up a quarter of all homes in the UK.

This increasing size of ‘generation rent’ — which is the current shorthand for the young people who are being forced to rent because they can’t afford to buy — is now being tackled by the government. High house prices, the need to save up a large deposit and the problems of a low credit scores among Millennials are the key drivers behind generation rent’s expansion.

Consequently, frustration among young wannabe home owners has been growing for some time. In 2017 this broke out into the open when Plymouth builder Jamie Pogson began an e-petition calling for rent to be added to tenants’ credit histories. The petition followed his own struggle to get a mortgage because of his poor credit rating despite having paid many tens of thousands of pounds in rent and was signed by over 147,000 people.

Make rent count

A few months later the government launched its Rent Recognition Challenge, an initiative by HM Treasury to fund initially six and then three fintech companies to develop their platforms to help tenants ‘make their rent count. One of this trio was CreditLadder, which was the biggest winner, awarded £600,000 following a competitive pitch.

Renters can now connect their bank to CreditLadder to report their rent payments. CreditLadder is the only way to improve your credit score and position across all three of the main CRAs in the UK, namely Experian, Equifax and TransUnion. The aim is to help CreditLadder tenants to gain access to better financial deals and help them step on to the first rung of the property ladder.

Public attitudes have been changing in recent years. Rather than shrug their shoulders and accept the inevitable, many have been calling for the financial sector and government to do something about the ‘creditworthiness crisis’, as some have called it.

The budgets of millions of households were squeezed by the global financial crisis, and continue to be so eight years later. The government is keen both to help people access more affordable credit and help fix the ‘broken’ housing market by helping more people on to the property ladder. Our pioneering rent recognition service for the private rental market is playing a part.

CreditLadder can help you improve your credit score

If you want to improve your credit position by reporting your rent payments, CreditLadder is the only way to improve your credit score and position across all four of the main Credit Reference Agencies in the UK, namely Experian, Equifax, TransUnion and Crediva. Building up a high credit score has a lot of benefits, including helping you access finance at better rates - this can also help save you money.

CreditLadder also runs a free mortgage application service in partnership with Tembo which will tell you how much you could borrow.

Remember the information provided in this article is for information purposes only and should not be considered as advice.