Credit reference agencies are using traditional credit scoring methods that are out of sync with modern financial life and that fail to accurately capture the creditworthiness of many people according to research released by trade body Responsible Finance. As a result, consumers are either completely financially excluded or pay a premium for credit.

Responsible Finance says credit scoring is dominated by a handful of companies globally, all using similar data sources and scoring models. Scoring is based on an era when people had steady employment and predictable incomes. In a time of zero-hours contracts and the gig economy, they are out-of-date with modern living.

This means lenders do not always have the information they need to make informed lending decisions, leaving people locked out of credit, with little choice of credit provider or paying more to access credit. The annual cost of having a poor credit score per household is estimated at £1,770 extra for basic, everyday goods and services.

Existing credit scoring models create ‘invisibles’ and ‘un-scoreables’. In the UK, a survey of 2,000 consumers found that 57% were at risk of being turned down for credit. This included a third who were in full-time jobs and a third who earned more than £50,000 per year. Many of those most affected don’t have a credit history because they live in shared accommodation and don’t use credit cards, for example.

Responsible Finance is calling on credit reference agencies to take their responsibility for financial inclusion more seriously as the negative implications of exclusion on individuals and communities are far-reaching.

In its report, Responsible Finance calls for the adoption of inclusive credit scoring approaches, which have the potential to stimulate greater financial inclusion and fair lending. Inclusive credit scoring approaches assess creditworthiness using different data sources, alternative forms of data, and wider sets of financial and non-financial analyses. They do not aim to lower the bar for credit ratings, rather they improve accuracy.

Jennifer Tankard, Chief Executive of Responsible Finance, said “Our report demonstrates the limitations of traditional credit scoring models in their ability to understand and capture the financial reality of consumers today and to support full, fair and appropriate access to credit markets. It is essential that credit reference agencies step up to the challenge and take their role in financial inclusion more seriously.”

“We believe that inclusive credit scoring can more accurately reflect ‘true’ creditworthiness, allowing for more appropriate provision of credit. It supports fairer access and financial inclusion. Responsible finance providers enabled 55,000 consumers to access affordable credit last year. The wider adoption of inclusive credit scoring would enable many more consumers to access their services, and transform the financial inclusion landscape in the UK.”

Amanda Beswick, Director of the Housing and Homelessness Programme, Oak Foundation, said “’Access to credit is a key financial management tool for most households. Oak Foundation was pleased to support this research which highlights how outdated credit scoring techniques financially exclude already disadvantaged households. We support the recommendations of the research which, if implemented, would ensure more low-income households can access affordable credit. It is part of a wider programme of research supported by Oak Foundation, looking at tackling social disadvantage by improving access to affordable credit.”