Credit scores are meant to be a reliable way of assessing how likely someone is to repay a debt. Lenders use them to determine whether to give you credit and, if so, how much interest to charge. But could the current credit score system be flawed?
According to a new study, close to half of Brits believe the current credit score system isn’t fit for purpose. Let’s take a look at why this is the case, whether the current credit score system needs to change and what you can do to take control of your financial future.
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Credit score system: what do Brits think about it?
According to a MyLifeKit and Censuswide poll, 54% of British adults aged 18 to 34 believe the current credit score system is fundamentally flawed. A sizable proportion (44%) of respondents aged 35 and up also share the sentiment.
Overall, 46% of adult Brits agree that the current credit score system is ineffective.
Why do Brits think the credit score system is flawed?
According to the study, 39% of respondents think it’s unfair that their credit scores are used to judge them based on financial decisions they made up to five years ago.
Meanwhile, 38% believe that their credit scores do not accurately reflect their current lifestyle or livelihood. Credit scores, according to 34% of people, are not an accurate reflection of a person’s creditworthiness.
The fact that you receive a poor credit score if you have a limited credit history is one big reason that the credit score system is considered flawed, according to 36% of respondents.
Is it time to overhaul the current credit score system?
Romano Toscano, CEO and founder of MyLifeKit, questions whether it’s actually fair to judge people’s creditworthiness, and thus their eligibility for financial services, purely on financial history. In an age when enriched data about people is widely available, he believes that the current credit system should be rethought.
He explains, “We must start to see a shift in how financial, healthcare and retail industries deploy enriched data to determine an individual’s creditworthiness.”
“Said data could include context relating to their lifestyle, health, fitness and the wider environment and economy, all of which are already being tracked and observed by consumers and businesses already.”
How can you take control of your financial future in the meantime?
There’s nothing much you can do as a consumer to change the current credit score system. Until the system is updated to take enriched data into account, many borrowers will continue to feel like the odds are stacked against them.
Right now, the best thing you can do is try to improve your credit score. This will help you take control of your financial future. Here are a few ideas to help you do that.
1. Get on the electoral register
Being on the electoral register allows lenders to verify who you are and where you live. This can have a positive effect on your credit score.
2. Pay your bills on time
Paying your bills in time will lead to a positive payment record that can help improve your score. It will also help you avoid late fees.
One of the best ways to make sure that your bills are paid on time is to set up automatic payments.
3. Keep your credit utilisation ratio low
Your credit utilisation ratio is the amount of your total available credit that you are using.
Lenders see a low credit utilisation ratio as a positive, and this can improve your score. As a rule of thumb, you should aim to keep your credit utilisation ratio below 30%. So, if you have £1,000 of credit available, aim to use no more than £300 of it.
4. Apply for a credit-builder card
A credit-builder card aims to help people with a limited credit history or low credit scores improve their situation. The card typically has a lower credit limit and a higher APR. However, it has lower eligibility requirements.
If you use the card and pay off the balance at the end of each month, you can show lenders that you are a responsible borrower. Your credit score should go up over time.
Does this sound like something that could work for you? Check out our list of top-rated credit cards for bad credit to get started.
5. Check your credit report regularly for any errors
Credit report errors could have a negative impact on your score. Make a habit of reviewing your report on a regular basis so that you can note and take steps to correct any errors.