So, CRAs come up every now and then, and lots of people have lots of hate for them. A recent post in the Revolut chat led me to want to write about them, but I didn’t want to take that thread further off topic, so here it goes:
I know lots of people hate them. And I feel uneasy about the amount of stuff they know about many people who don’t even know of their existence and have never dealt with them.
But, I feel we as consumers still need them: A while back a relative of mine bought a flat, and needed a mortgage. That’s a fairly normal thing, you’d say, but he did that in a country where credit referencing agencies don’t exist. It was a major nightmare to do, and took him months to find a mortgage, as banks couldn’t appropriately asses his ability to pay back. Mortgages are only available with a life time of 3-5 years (in a market where the average flat costs about 5 times the annual gross salary). And even then it came down to him having to figure out whom he knows that knows someone at a given bank’s management or mortgage department. Any other type of credit is really hard to get over there as well.
So, yes, credit referencing agencies are a pain and privacy nightmare. They often don’t deal with our data responsibly (see the Equifax breach), they may hinder our ability to get credit for nonsensical reasons, but are there better options? I’d love to know!
I don’t think they are a necessary evil; I actually believe they might make fraud easier.
I haven’t had the time to test this properly (making sure to protect my own identity so it doesn’t backfire on me, even though none of this would be actually used to cause damages to anyone), but from my understanding, you could fraud your way through low security companies (telecom, utility, etc), which would report to the CRA and thus build your profile - eventually with a solid enough profile thanks to this you’ll be able to pass KYC checks at online banks with a (fake) passport which the CRA would actually confirm based on previously learnt (fake) data.
To me the CRAs are more trouble than it’s worth - they invade our privacy, they run on a nasty business model where they use our data to recommend often scammy products (especially when you have bad credit), and can be trained to authenticate bad data as described above, making fraud easier.
Oh, I agree with that! And it’s terrible that credit records like this can be used for KYC! But that to me seems to be a problem with the UK’s lack of identity documentation (a discussion that we’ve had before). In Germany CRA does exist, but it would never be considered sufficient to pass KYC checks: For that you need ID.
But my question is: My credit record is what make lenders willing to lend me money. The only case I know of a country where CRAs aren’t available, is that credit is available only to those who have connections to the bank. Surely, that can’t be in anybody’s interest.
So: What alternatives do we have to make credit widely available?
France has no credit history system nor CRAs. No Experian, no ShittyFax, nothing. Lenders are thriving and fraud levels are low - probably lower due to the lack of the above loophole. Identity theft is a lot harder because just a name and an address won’t get you anywhere.
Each credit application is evaluated on its own merit, with the lender asking (and actually authenticating) a lot of paperwork like proof of employment, payslips, etc before giving you an answer.
To deal with (really) bad credit, there is a register called “Interdit bancaire” (literally “forbidden of banking”) onto which you will get if you fail to pay repeatedly, the lenders take you to court and the judge sides with them - in that case you are essentially declared bankrupt (the mark on the register lasts 10 years). I feel like this is fair as a judge needs to be involved, and prevents awful entities like your telecom company from ruining your credit like they can do here.
Do companies need my consent to carry out a credit search
The DPA doesn’t actually require these companies to have gained your consent before they can carry out a search of your credit file as long as they have a legitimate reason for doing so and you have been told that this search is going to take place. If you have taken out a loan or credit card you will probably find this in the original terms and conditions that you signed.
Also, interesting to note that ICO website says;
As there is no DPA requirement for lenders to report such data to the credit reference agencies, …
So, in theory, Monzo could opt-out of reporting our info to any of the CRAs.
The easy availability of credit actually pushes prices up. There have been some interesting academic studies into the cost of living over the last few decades, and one of the conclusions is that the cost of running a household appears to expand to encompass the wages available. If you compare the average wage to cost of living in the 50s, one wage could cover a ‘typical’ household. As more households gained two earners, the cost of running the typical household increased such that those without two earners fell behind.
House prices shot up when Thatcher freed up credit in the 80s and in fact overshot as evidenced by the problems when the interest rates went up.
It’s a bit more difficult but not impossible - it’s routinely done in-stores and takes about an hour, with questions related to your employment and scanning some papers.
My major gripe with CRA’s is because they lead to “Computer Says No” more often than not. Just because someone may have defaulted on something 4/5 years doesn’t necessarily mean they are currently in the same position. I think in these sorts of circumstances there should be more human intervention and the ability for a potential customer to at least explain the situation and have their circumstances assessed with some human compassion attached to it. A lot of people lose out from mainstream lending and end up with sub-prime lenders paying way more than necessary just because a CRA check didn’t come back with the necessary “score”.
technically it does not come back with a score, just with the data they hold, any scoring is an internal thing done by the lender using their own criteria…but I know what you mean
That’s the difference. With CRAs decision can happen in seconds.
I can shop at ASOS, and apply for credit at the checkout either via PayPal or Klarna and get a decision in split seconds - I think that brings immense value.
For a modern and digitalised economy where significant amount of commerce takes place online - I think the benefit CRAs bring far outweighs the risks.
From lenders perspective, digital footprints are far harder to falsify. A customer can easily doctor their bank statements/ payslips with photoshop and lenders have no ability to validate them but to take them at face value.
Whereas when it comes to CRA, if someone tries to falsify their records via less ‘responsible’ companies, lenders can still easily pick up any inconsistencies because your falsified records is different to records from other companies.
Plus CRAs take active steps to make sure the data they hold on us are as accurate as possible as they also do their own checks across different companies that provide them data. If they found that a company has been providing inaccurate data which is quite easy to spot given how rich digital footprints are, they often block the companies until they fix their data submissions.
Bit of history - I used to work in the payday industry as an analyst and we used to ask for bank statements/ payslips when underwriting customers before we had CRAs. Digitalising our loan applications using CRA data allowed us to control our risk and screen out dodgy customers much quicker, and provide a faster and smoother process for customers. Imagine you’re in need of a loan urgently - do you really want to spend 1 hour in a shop before realising you can’t get a loan and then go elsewhere to try again? Or would you rather find out your decisions in seconds and then move on?
Whilst that can be an advantage, it can also be a disadvantage, can’t it? Because it leads to exactly the scenario @Brian_L and @Austen described earlier: Computer says no.
I can shop at ASOS, and apply for credit at the checkout either via PayPal or Klarna and get a decision in split seconds - I think that brings immense value.
I can do the same in France directly online with just a debit card and no problems; not sure how they manage their fraud & risk level but clearly they are still making money.
On the other hand the CRAs can be fooled into authenticating false information (as my first post above says) is a very real threat; not to mention that a lot of shitty companies can take consumers hostage or else they will leave a black mark on their credit report; something you don’t see in France for example - if a telco isn’t holding up their part of the contract you block the payment and move on without any worries - they know it perfectly well and as a result the situation is slightly (though not by much) better.
That’s not the same though - I’m talking about POS financing, not paying with debit cards. On ASOS or any websites that has paypal credit, you can apply for loans at the point of check out to finance the purchase.
With debit card, you need to physically have the cash to pay for your order. Not the same as POS financing/ or apply for loans online in general.
Thing is though, score cards are built using statistical methods. Just because you’ve defaulted on a loan 4/5 years ago doesn’t mean that you’ll default now, but if 9/10 people who defaulted on their loans 4/5 years ago will also default now, it means that sadly you’ll also likely to have low scores.
Whether or not credit score is effective/ personalised enough is another different debate.
That’s where machine-learning/ non-traditional data can come in and unlock lending for the less prime customers.
Traditionally, scorecards are built using logistic regression and can only take up to 50 variables at the maximum before performance starts to degrade, and lenders often can only pick the top most powerful variables, which inadvertently limits how ‘personalised’ a credit score is.
But with availability of non-traditional data, new technology and general trend to adopt machine learning techniques, many lenders especially in the subprime market is slowly adopting additional data to build a more personalised scorecards.
E.g. Zopa use a random forest model for their scorecards, Wonga tracks website behaviour in their scorecards e.g. how fast and how much you slide your loan amount to etc etc.
The argument of CRAs leading to ‘computer says no’ isn’t a CRA problem, but it’s a problem of statistics.
