You’ve reached chapter two in our mini-series: credit explained. Here we delve into the existing credit ecosystem and why it needs an upgrade.

The challenge for lenders

When it comes to making credit decisions, lenders rely on records from ‘the big three’ consumer reporting agencies: Experian, Equifax and TransUnion.

These records are made up of traditional data sources, containing historic, and often incomplete or outdated, credit information. At Aire, we believe that this causes an undeniable, yet little understood, problem at the heart of our credit system.

For lenders, the impact of this problem is commercial. For the rest of us, it’s personal. Cut off from vital sources of short and medium-term capital, many consumers struggle without access to credit for their entire lifetime. For others, it leaves no choice but the taking on of greater debt by accepting higher cost alternatives to provide for their families.

With lenders assigning different acceptance criteria to financial products, the opportunity for marginal decline is another area that leaves so many without access to the credit they could, if assessed differently, be eligible for.

The consumer landscape

The consumer landscape is also rapidly evolving. The financial lives of many of us have, for years, been interpreted by lenders as unconventional: the self-employed, the young and those who move around for travel, work or education are just some of those impacted.

Multiple income streams and the rise of the gig economy are important factors in causing consumers to face exclusion from the existing credit system as lenders struggle to score them appropriately using existing methods.

Once important, now critical

At the start of 2020 in the UK, it is estimated that 17.5 million people would struggle to obtain mainstream finance due to a shortage of historical credit data, or lifestyles that appear too risky for the appetites of most lenders.

This lack of clarity has been exacerbated by the recent seismic changes we’ve seen across the credit ecosystem over the last year, plunging many more millions of consumers into sudden and unexpected financial difficulty.

Understanding daily changes

In today’s climate, predicting the impact on consumers is even more difficult. The effect of Covid-19 on borrowers is highly unpredictable, depending very on the sector, personal circumstances and luck.

And when financial situations are changing daily, traditional data sources are not useful indicators of creditworthiness or affordability, taking months to report change or to record defaults. They are just not dynamic enough.

How can lenders responsibly support their customers with the credit they need, confident that their customers’ current financial situation won’t push them into further debt in the weeks and months to come?

At Aire, we believe the consumer holds the key to new data that can change this. It’s why we engage directly with consumers to deliver the full picture to lenders. We call this first-party data and it’s shifting the balance of credit scoring for everyone, forever.