Covid-19 means falling credit scores. A holistic view is needed

Covid-19 will increase bad debt. Covid-19 means falling credit scores.

Spending 1/5 of monthly income on credit is already tight. But losing 20% of a salary (assuming employers pass this cut on), means debts will be harder to repay.

And the self-employed are faring worse. Currently they can only claim £94 per week. Support schemes will take weeks to provide an income.

Despite this, the desire to help our local communities is huge. Lending must continue in uncertain times. Without the lifeline provided by credit unions, some of the most vulnerable households would suffer even more.

The unfair impact on borrowers

Loan payments are going to be missed. Defaults will be reported. Covid-19 means falling credit scores. Debtors, in most cases, won’t be to blame.

Borrowers will be punished with increased decline rates and higher interest charges.

Open Banking and NestEgg’s work on Financial Health Indicators are two examples of attempts  to take a wider view of a borrower. But for now, the data that dominates decision making is provided by Credit Reference Agencies (CRAs).

Consequently, we’re calling on the CRAs to take action.

A ‘U’ flag appended to a credit file could will help show that payments missed were due to the crisis. But when the flag is present, the credit score could remain untouched. When the crisis is over a little more generosity in the treatment of CCJs and insolvencies may be required.

 

Open Banking and financial health

People suffering the consequences of the virus, through no fault of their own, should not be further penalised. Furloughed workers might be losing financially today, but without action they’ll lose financially in the future too.

Open Banking provides an up to date view of an applicant’s financial position. Open connections enable monitoring over time. Lenders can be more in sync with a borrower’s affordability and could adjust payments to compensate.

But Open Banking is only part of the wider picture of someone’s financial health. Credit bureau data provides a long-term view complementing the snapshot provided by recent bank transactions.

Savings should also be taken into account, enabling asset-based borrowing. It’s impossible to de-link borrowing and saving. They are two sides of the same coin.

Back in the 90s, before credit unions used credit bureau data, a credit committee of volunteers would assess an applicant’s ‘balance sheet.’ Mostly made up of savings and property it was a way to assess net worth. Positive changes to net worth are a way to assess the impact a responsible has on a member’s wellbeing.

This wider picture of the applicant better supports credit unions as they help people in difficulty. It also identifies the point where a money advice intervention would be more appropriate than a loan.

Next steps

In a time of social distancing, online access to services is now more important than ever.

NestEgg can get lenders up and running quickly. Online loan applications link to automated decisions. Credit bureau, Open Banking and savings data and used to show applicant’s overall financial health. Our app will identify ways to improve financial wellbeing in the coming months.

Contact us to get started.

About Adrian Davies

Adrian is a co-founder at NestEgg. He is an alternative finance and credit union expert with extensive experience of start-ups, business development, IT, Target Operating Models and regulatory compliance. Adrian has 20 years’ experience in the responsible lending sector, supporting credit unions with innovative ideas so they can grow and meet service user needs.

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