Younger people are forking out thousands on rent but remain credit-invisible and unable to borrow; unlocking data could be the solution, writes Alex Marsh
For the more than third of the UK population who rent their homes, soaring rental prices have been a major contributor to the prolonged cost of living crisis. In the past two years, average UK private rental prices have risen by over 10 per cent. The average UK renter pays almost £1,300 a month for their accommodation – over half the monthly take-home pay of someone on the median UK income.
Consumer spending on utilities has also jumped up in this same period, fuelled by the surge in energy prices. For the period from January to March 2024, Ofgem’s estimate of a typical household’s energy bills is £1,928 per year. That’s almost twice the £1,042 level for the period ending March 2021.
These expenses are not only large, recurring and on the rise – they are also essential for our day-to-day lives. When it comes to shelter, heating, or electricity, it’s rarely a case of tightening your belt and going without. That means that making regular payments for rent and utility bills has demanded even greater financial discipline from consumers in recent years.
If that were your mortgage or your credit card, you’d benefit from a track record of on-time repayments in the form of a higher credit score. That would mean you can be more easily approved to borrow at a cheaper rate in the future. But the current workings of the UK’s consumer credit systems unfairly rule out certain forms of payments – most significantly, rent and utilities – from that credit score calculation.
Certain demographics are disproportionately impacted by this – most obviously, the young. Nearly half of under-35s in England rent from private landlords. Their spending on utilities may be even more hidden from view if they are not listed on utility bills in their family homes or live in shared or student accommodation. That adds to the ways in which this cohort is already disadvantaged in what credit score providers and lenders look at. Whereas lenders prefer full-time employment, this ignores the growing prevalence of gig economy roles, which are disproportionately staffed by the young, with 56 per cent of these jobs filled by those aged 18 to 34.
This becomes a vicious circle: a lack of access to affordably priced mortgages, combined with the effect of higher interest rates, prevents people from getting on the property ladder and building their credit records. Hence you now have 5.8m adults who are deemed ‘credit-invisible’, i.e. with little to no credit footprint.
The credit reference agencies (CRAs) who build these credit scores are well aware that the traditional datasets on which they rely can be incomplete and risk becoming less relevant for young people. But the way in which financial data is held in different ‘walled gardens’ means that CRAs can’t easily get hold of the evidence for this track record of responsible payments when assessing somebody’s creditworthiness.
There are a number of commendable localised initiatives seeking to fix this disconnect. The app Loqbox offers a ‘Rent Recognition’ feature to precisely do this, for example. But the issue is symptomatic of a wider problem in UK financial services – namely, that a lack of data-sharing is worsening consumer outcomes. It follows, therefore, that enabling more data-sharing across the wider financial services sector will help fix this problem, among many others.
The Centre for Finance, Innovation and Technology (CFIT), created last year on the recommendation of the Kalifa Review of UK Fintech (and where I serve as a non-executive director), has convened its inaugural industry-wide coalition on this topic of ‘Open Finance’. The coalition’s team of over 50 industry experts has been looking under the hood at how some key parts of the credit-decisioning process work, as a test-case for opening up additional datasets.
It may sound technical, but if we can agree the principles and, importantly, an associated timeline for unlocking dozens of currently inaccessible or underutilised datasets – be that rental, utility and subscription payments or HMRC and Companies House data –we will reap some extremely tangible benefits. It would drive innovation and more competition in the UK fintech sector and economic growth, by allowing firms to draw on new data sources to deliver better outcomes for consumers – more informed and fairly priced lending decisions being just one example. If we get it right in the UK then history tells us that other countries will follow our lead (as they have with open banking), meaning that fintechs can more easily export their products overseas.
And, for consumers, the vicious cycle of credit invisibility can be brought to an end. Letting people show that they’ve been paying their rent on time can help millions to exit Generation Rent and step onto the property ladder.
Alex Marsh is a non-executive director at the CFIT and the former UK head of Klarna
Our credit rating system is out of date and Generation Rent is paying the price
6
0
23.01.2024
Younger people are forking out thousands on rent but remain credit-invisible and unable to borrow; unlocking data could be the solution, writes Alex Marsh
For the more than third of the UK population who rent their homes, soaring rental prices have been a major contributor to the prolonged cost of living crisis. In the past two years, average UK private rental prices have risen by over 10 per cent. The average UK renter pays almost £1,300 a month for their accommodation – over half the monthly take-home pay of someone on the median UK income.
Consumer spending on utilities has also jumped up in this same period, fuelled by the surge in energy prices. For the period from January to March 2024, Ofgem’s estimate of a typical household’s energy bills is £1,928 per year. That’s almost twice the £1,042 level for the period ending March 2021.
These expenses are not only large, recurring and on the rise – they are also essential for our day-to-day lives. When it comes to shelter, heating, or electricity, it’s rarely a case of tightening your belt and going without. That means that making regular payments for rent and utility bills has demanded even greater financial discipline from consumers in recent years.
If that were........
© City A.M.
visit website
login
who are we?
contact us
qosheapp
Toi Staff
Gideon Levy
Belen Fernandez
Andrew Mitrovica
Mort Laitner
Rami G Khouri
Ali Fathollah-Nejad
Nikkei Editorial
