Britain is considering legal changes that would help low income earners – who pay interest rates of up to 1,500 percent for emergency loans, washing machines and mobile phone tariffs – to borrow at fairer rates.
Campaigners hope to tackle the “poverty premium”, where poor households pay hundreds of pounds more each year for everyday goods and services because of a poor credit rating.
Such borrowers pay high rates on short-term loans from so-called payday lenders like Wonga, and when buying furniture and electronics from weekly payment retailers like BrightHouse, as well as higher pre-paid energy tariffs.
“How do we improve their ability to trade and gain goods at a fair price?” asked John Montague, a director at Big Issue Invest, the social investment arm of The Big Issue, a magazine sold on Britain’s streets by homeless people.
“Well, it’s by trying to build up their credit worthiness. And actually rent is a good way of doing it.”
The magazine’s founder, John Bird, introduced the creditworthiness bill to Britain’s upper house of parliament in 2017, after which it will proceed to the lower house.
By making rental payments a compulsory part of a good credit score, the proposed law aims to built a positive credit history to increase access to mainstream affordable credit and services.
The British market regulator estimated about 1.8 million payday borrowers in 2012, although the market has shrunk since 2015 when the financial watchdog capped high cost credit, following reports of interest rates of almost 6,000 per cent.
But falling wages relative to inflation and budget cuts in social support have pushed more people back to costly lenders.
Loans averaging 260 pounds are usually taken out by young men in full-time work, living in large households, who urgently need to pay expenses like food and utility bills, a 2015 study by the market regulator found.
Four out of 10 payday loan customers had a bad credit rating, it said.
The bill could help millions of people in Britain whose regular rental payments do not boost their credit rating – unlike those who pay a mortgage, Mr Montague said.
Taking rent into account when it comes to credit scores has already been tested with the Rental Exchange, an initiative set up by Big Issue Invest with the credit scoring agency Experian.
In its six years of operation, Experian has been accruing data on rental payments from more than 1 million people who are tenants of housing associations or local councils.
“Our records show that 83 per cent stand to see their credit scores boosted because of their rent payment data,” James Jones, head of consumer affairs at Experian told the Thomson Reuters Foundation.
