Credit where it’s due: using data to overcome barriers to credit

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Policy in Practice has been commissioned by the Financial Inclusion Commission to investigate how public sector data can be used to widen access to mainstream credit, and improve the credit files of those who may be at risk of financial exclusion. 

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An estimated 6 million households in the UK have ‘thin’ or no credit files and are unable to access mainstream credit, leaving them little option but to borrow from doorstep and payday lenders, at high interest rates. With data increasingly seen as an asset both inside and outside of government, there are growing opportunities for it to be used to help low-income households to access mainstream credit.

Data insights could improve the lives of millions of financially excluded Britons

Policy in Practice has set out three ways in which data could be used to boost financial inclusion across the UK.

1. Credit score more intelligently

Administrative data collected by local authorities could be used by Credit Reference Agencies (CRAs) to aid in three key stages of the credit scoring process: for identification and verification; to assess risk and creditworthiness; and in assessing affordability. Data from Experian’s Rental Exchange programme shows a big jump from 39% to 84% in digital identity authentication for social tenants when rent data is included in credit files. Furthermore, some 76% of tenants have an improved credit score from sharing rental data.

2. Identify millions of responsible borrowers

Secondly, public sector data can be used to widen the group of households considered for mainstream credit. Specifically, information on payment history and earnings within local authority-held datasets can be used in the credit-scoring process. This can help lenders to lower the crude income threshold below which a household is generally considered for mainstream credit. Analysis from Policy in Practice[2] shows that reducing the threshold from £15,000 to £12,000 would mean almost 5 million more households in Britain could potentially qualify for mainstream credit.

3. Understand the financial resilience of a household

Thirdly, given the recent pressure on lenders by the FCA to ensure that loans are affordable to the borrower, administrative data on low-income households can be used to assess affordability and identify people that may be particularly vulnerable. This data can be used to build a measure of a household’s financial resilience, which could in turn help inform whether that household is capable of meeting the financial obligations under a loan. Work done by Policy in Practice to measure financial resilience across low-income households in London has found that private renters and households in work are particularly vulnerable, compared to other measures of vulnerability.

Source: Sainsbury’s Bank, 2014. Guide to credit scores.

How to unlock the power of data

In order for data to become a tool which can successfully reduce financial exclusion across the UK, some significant obstacles have to be overcome.

Government legislation to open up public sector data is crucial. The collection of data can be done at a local or a national level and electronic ‘data wallets’ with informed consent offer different ways to collect and share this data with informed consent. The barriers to sharing data can be overcome, but require legislation that recognises the benefits as well as the risks.

The discussion around opening up data is increasingly on the government’s agenda, with the introduction of the ‘digital by default’ standards and Open Banking being significant strides towards this. Universal Credit is a great opportunity to continue this conversation, not least because of the scale of information it will collect.

Alongside this, more efforts must be made to educate lenders and CRAs on the benefits of using administrative data, which is largely untapped in the sector. Policy in Practice has set out three ways in which this data could clearly be beneficial as a tool to boost financial inclusion. It is critical that more work is done to test and refine these approaches, and that lenders, researchers and government continue working closely to communicate how this information and help open up markets and lend responsibly.

Boosting financial resilience today

Local authorities have at their disposal the tools to tackle financial exclusion already. Administrative data on low-income households can be used to measure household’s levels of financial resilience, which can in turn be used by councils to gauge the likelihood of financial exclusion or financial crisis.

With big challenges on the horizon, such as the ongoing roll-out of Universal Credit, it is imperative that local authorities have the tools and resources to ensure residents are financially resilient.

To learn more about how benefits data can be used to assess financial resilience, email hello@policyinpractice.co.uk or call 0330 088 9242.

[2] Policy in Practice analysis, 2017. Carried out using Policy in Practice policy modelling engine for the Financial Inclusion Commission. The source data combined Family Resources Survey data from 2012-13, 2013-14 and 2014-15.

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