A Guide to The Changing Face of Credit Reports and Credit Scoring

The Beginning

As far back as the first time someone borrowed money from someone, the lender had to some how make a determination that the borrower could, and would, repay the loan.

The lender may have based their decision on the fact they knew the borrower.  Almost like lending money to family and friends.

The lender may have known where the borrower worked and lived, and maybe even their wages or earnings, and ability to repay the loan.

Then there also would be, what is the loan for?

If the loan is to purchase something, the lender could attach or place their interests on the item, such as a piece of property, or if we go back further in time, maybe a horse or cattle.

You also have to consider the aspect of deposits, or security possibly outside of what the loan may be for.  If someone were to borrow £100 to buy seed to plant, the lender may want something of value in order to secure the loan.  Again, maybe a horse or cattle.

It sounds funny now, but many a moon ago, lending was that simple.  It was over the years that borrowing money and lending, being a bank, got a bit more complicated, and also regulated by governments.

In some ways, borrowing money and being a bank has gotten even more complicated and complex, however, in some ways it has also gotten much simpler, and as we work our way through how borrowing and credit reports, and credit scoring has changed, you will note the complexities of the future, and similarities of the past, in borrowing and lending money.

Some may remember back when you went to a bank for a loan, and you would sit down, face-to-face with either the bank manager or a loan officer, and you would plead your case for a loan, and complete a loan application.

The loan application had to be approved by the bank’s lending board, or officers, who may have only met once a week.  You would then have to wait that time to find out if your loan was approved or denied.

I don’t think too many people can fathom that today; in an age when we expect and receive instant messages, fast food, and quick decisions.

 

Credit Bureaus

To anyone who granted credit, loaned money, or extended some form of credit, it became apparent that some system needed to be put into place to allow those that lend money, to know who was a better risk and would repay the money that was lent out.

This started what has now become known as credit bureaus.

Credit bureaus are in essence data gathering companies, that are reported to by banks and credit issuers, and this data or information is compiled into a credit report.

Here in the UK we have three (3)major credit bureaus:

  • Equifax
  • Experian
  • Call Credit

In the United States they also have three (3) major credit bureaus:

  • Equifax
  • Experian
  • Transunion

While two of these companies are the same here in the UK and US, they do not share details and information between the two countries.

Your credit report in the UK is not the same as what your credit report may be in the US.

If you look at the history of credit reports, it is a long and varied one.

Equifax began in the late 1800’s in the USA by a grocer who kept a list of those customers he extended credit to.  This list became of value, and he began selling it.

Experian began in London in the 1820’s by a group of merchants called the Manchester Guardian Society. They began collating data on their clients, many of which failed to settle their accounts or debts.

From these humble beginnings we have what we call credit reports and credit reporting today.  Credit bureaus gather their information from banks and lenders who report their customers accounts to them.  However, not all lenders report to all three credit bureaus, and some lenders, especially doorstep lenders, may not report to any credit bureaus.

Most lenders want to report this information as it is in the benefit of all who lend money to know who they should and can lend to.

But as we’ll see, credit reporting needs to change again to keep up with the times. Most credit reports only have the following details on them:

  • Your name and date of birth.
  • Your address.
  • Your accounts, those which you owe, or have paid off, and how you have paid them.
  • Any public records such as bankruptcy, CCJ’s, and Enforcement Orders.

This information stays on your credit history for six (6) years, then drops off.  In addition, credit bureaus are unbiased, they take no sides and have no preferential treatments.  Your credit report has to be an accurate representation of how you have paid your accounts, with accurate details about you.

From these details, a lender is to make a determination as to approve or reject a loan.

As one can imagine, this can take time, time to review the credit report, decide if you have paid your accounts in a good manner, check affordability, and then to approve the loan request.

As consumers, we don’t like to wait, and lenders soon realised this, so credit scoring and automated results was born.

 

Credit Scores are Developed 

With technology changing in the 80’s and life becoming more fast paced, as consumers and borrowers we wanted quicker answers when we applied for a loan.  So many banks and lenders, went to a more computerised system of lending.

This required a quicker way to determine if a borrower was a good risk for a loan, so a few different models of determining this were created.  And one was credit scoring.

 A numerical score assigned to predict the probability of repaying a loan.

This “score” was based on five (5) main factors:

  • Payment history:  This makes up 35% of your credit score, how you pay your reported accounts.
  • How long you have had credit:  15%, how long have you been reported as having credit in the credit bureaus.
  • Types of credit:  10%, what types of accounts do you have, revolving accounts like credit cards, car finance, mortgage, etc.
  • Balances on your accounts:  This comprises 30% of your credit score, how much you owe.
  • Inquiries or footprints: 10%, each time you apply for credit the lender who views your credit file leaves a footprint or inquiry.

As you can see there are many things and factors this model for credit scoring does not take into account.

It doesn’t reflect your job or wages, how long you have worked, or how long you have lived at your current address.  It also doesn’t show if you have a bank account or savings account, or even how much you may have in the bank.

While your credit score may give an idea or glimpse into how you may repay a loan, it is a limited account based on a few factors.  Granted, payment history and how much debt you have are huge factors, but there are other ways to assess if someone is credit worthy.

In addition, credit scores and credit history can be used in determining insurance premiums and also used for jobs.

Some insurers base premiums, in part, on your credit history, and some employers use credit checks as a part of the hiring process.

With the limited information on a credit report, it is difficult to see how a potential employer can relate your credit score to how you will perform at work.

Some industries, such as banking and finance, and cash handling, may deem it necessary to know your credit history prior to hiring someone.

 

Social Media’s Role in Credit, Jobs, and The Future

Let’s digress for a moment, however, this digression will tie in with credit and credit scoring very soon.

Let’s talk social media!

It’s in the news, it’s in our lives, and it appears it is here to stay….for now.

We can face time, tweet, like, unlike, have our relationship status known to the world, and changed daily, all with the flick of a wrist or finger.

Not only does social media allow us to express ourselves, and stay in contact with friends and family, it also is a repository of data, our data.

And while for the majority of us, these social outlets are harmless and fun, the information we post and keep on them can be useful in many ways.

Potential employers have used checking someone’s Facebook profile or other social media postings as a regular part of vetting someone they may be considering hiring.

And I am sure many have heard about someone being fired due to something they posted on a social media site, or maybe used company time to post things.

Lost touch with an old friend and cannot locate them, try Facebook, or other social media. And it isn’t just use using these means to locate someone, collection agencies use them as well to find people they are to collect money from.

These web sites and social playgrounds are there for a reason, yes to allow you to express yourself and communicate with friends and family, but also to harvest data.  These sites are free, so how do you think they make money and stay in business???

Our data is valuable, and more than many may realisethis. It can be sold to companies, who can then “target market” their products and services to us.

Think about it, if a company knows your relationship status, we will say married, and that your have children, just those two pieces of information can help them target specific products to you to consider purchasing.

Just like how cookies are used on web sites, it gives the seller a better idea of what you may be looking for to buy.

 

Social Media and Credit

OK, now that our little digression is over, how does social media fit in the context of credit scoring, credit histories, and lending money?

Easy, with all that information about yourself at someone’s fingertips, those fingertips may be a bank or lender.

As we will see, and as mentioned, credit scoring in its current model is antiquated, and not really fit for purpose.  There is so much is doesn’t say or tell about us.

Social media tells more.

For someone with no credit or credit score, this can be a good way to get on the credit ladder, so to speak.

If someone has had bad credit in the past, this can be a way to improve their chances of getting a loan.

Of course there can be some downsides to this, such as you being “judged” by the company you keep.  It could also be not just the company, but how many friends you have or how many likes.

 

Social Credit

Let’s take credit scoring, social media, and a few other new generation technologies and data gathering tools, and throw them all together to create a new way to score someone for a loan, and also for other things, and we will call it…….Social Credit!

And it is already being tested and rolled out in China.

Getting a social credit score is a complicated process, but it does take into account much more than payment history, balances on accounts, and it can be used in a much larger context than just granting loans.

Information to create a social credit score can be obtained from a variety of places:

  • Social media: A wealth of information can be found in our profiles, and from our likes and friends.
  • Emails:  Who we email and what we email about.
  • Loyalty programmes:  These programmes gather information on us to know what we like and buy.
  • Credit cards:  Cash is still being used, but less and less.  It is easy to track every purchase you make using a credit card, and not just know what you bought, but from whom, and time and dates.
  • Debit cards:  Same as credit cards, but information about your bank is also good to know.
  • Mobile phone applications:  Do you use an Uber application, or other taxi service’s application, information on where you travelled to and from is there.
  • Health records:  Not accessible yet, but they may be used in the future.
  • Gym memberships:  Are you fit, healthy, go to the gym.

When you think about it, as we move towards being a cashless society, it is easier to obtain information on what we do, what we like, dislike, and buy.

With all this information matrixed together, someone may be able to tell that you order junk food online to be delivered, watch a lot of TV due to your satellite TV subscription and services, you’re unemployed, so they may assume you are overweight, perhaps lazy, and this could give you a lower social credit rating than say someone who has fresh produce delivered from one of those “in a box” meal services, and has a gym membership, that they use early morning prior to going to work.

A lot of speculation there, but there is a lot of data and information there as well.

However, if this sounds a bit “Orwellian”, that is because in many ways it is.

As mentioned China is beginning to use this system, and not all of it is for the good of all, but that is not what they are saying.

China is using the social credit rating system to restrict travel for those that have low scores, and/or have records of certain offences.

The travel ban will “block travel” for those under the ban for one year.  Some offences that could get a person banned are smoking on trains, using an expired ticket, spreading “false information about terrorism”, and cause disruptions on flights.

This is just a beginning.

China being the type of country they are, and having the government they have, are also looking beyond the travel ban to “throttling Internet speeds”, impacting if you get the best jobs, your children’s schools, where they can attend, keeping you out of the best hotels, and being publicly named and shamed as a “bad citizen”.

That my friend is Orwellian!

However, on the flip side, good citizens, those with good social credit scores, can get discounts on things, lower interest rates and rent things without having to pay a deposit.

It does show you the power of all that data and information when harnessed, collated, and used as a score.

 

The Future of Credit Scoring

We have already stated and questioned as to is credit scoring in its current form is it fit for purpose.

When you compare it to all the additional data and information available and is out there, the answer may very well be, no, it is not fit for purpose and it needs to be overhauled and updated to fit today’s society and technology.

However, we also have to be careful of not crossing the line and credit scoring, or social scoring becoming too intrusive, or like China.

There are some recent changes being made in how one can improve their credit score, or even get a credit score, without going into debt.

The Rental ExchangeThe Rental Exchange is a programme started by Experian, and allows tenants who pay rent, to get credit for paying their rent on time.

If you buy a property and have a mortgage, the mortgage usually gets reported on your credit history, which can help your credit score if you pay on time.

Tenants who rent, do not get their rents reported to their credit histories, but can through the Rental Exchange.

Landlords can sign up for the programme and report how their tenants pay their rent.  It helps the tenants get credit for paying their rent, and it helps landlords know how a new or potential tenant may have paid in the past, and current tenants will want to pay on time to keep a good record.

LoqboxLoqbox is a relatively new concept and free for people who want or need to build a credit history and score, but don’t want to go into debt.

The way it works is that someone commits to a 12 month savings plan of anywhere from £20 to £500 a month.  The money is collected each month via direct debit, and it can be shown as payments to the plan.  At the end of the 12 months there are options as to what you can do with the money, even just withdraw it.

If someone were to find themselves unable to make a savings payment, they can close the account, and not face any penalties, or credit marks.

 

Data as Currency – Monetise Our Data

We know that data is important, an also valuable.  Companies like Facebook, Apple, Amazon, Google, are all looking to gather as much data and personal information as they can.

And we know that some of this data can be incorrect, flawed, obtained from unreliable sources.

However, what if we sold our data and details to who wants it.  We make money, and they get the real deal, accurate information.

The question then becomes, how do we securely hold and distribute the data and information, possibly through the same technology used for cryptocurrencies, like Bitcoin, blockchain technology.

Companies are already doing this with data on their customers, harvesting it, and selling it, and some are making millions doing so.  Companies making money off your data.

As to how this may tie in with the future of credit and credit scoring, all the data used for credit scoring can be kept safe in the same manner, blockchain, and could also be used to make money.  The two go hand-in-hand.

As we can see, technology is changing rapidly and changing us with it.  Credit reports, and credit scoring need to be updated and upgraded to keep pace with these changes and technology.

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A Guide to The Changing Face of Credit Reports and Credit Scoring

We all like saving money, but we can also find it very hard to do so.

Wages have not kept up with inflation, and so more and more, many of us are finding we have more month than money.

There are usual ways we try to cut back on spending, using coupons and vouchers, not going out, walking and using public transport to cut back on car expenses.  Even things like taking our lunch to work, are all good ways to save money.

However, sometimes you need to “think outside the box” so to speak, or get creative in your thinking, in ways to save some money.

In presenting some of these simple ways to save money, we realise, some are not going to be for everyone, and the savings we are attempting to project are based on one person doing this.  Should a large family follow some of the ideas there, the saving could be even higher.

So off we go into the amazingly simple, and some odd and not thought of ways to save money.

 

Off-Peaking

Off-peaking is a lifestyle concept that may not be for everyone, and it doesn’t mean living in a basement or some lower than sea level lifestyle.

It refers to living your life off-peak, or askew time wise of when the majority of the population live their lives.

Being off-peak is in essence, not following the crowds, avoiding the queues and crowds that seem to make up certain times of the day and evenings.

You do things, such as shopping, entertaining, and travelling, at times when other people are not doing them.

Here are some examples, and how much you may save.  Again, this lifestyle concept may not be for everyone, but even some slight changes in our behaviours, such as when we shop or travel, can save us money.

Food:  It would appear, just by the numbers in the supermarkets and shops, that Friday evening, Saturdays, and Sundays, are when the majority of people do their big weekly food shop. 

So why follow them?

This is not when the real bargains are to be had….oh no…that is later at night when the discounted food is put out.  And it is deeply discounted.  Usually because the sell by date is the next day, or possible that day.

So here is when your off-peak skills kick in.

You go shopping at the end of the evening when the discounted food is put out.

For a period of time, I worked for one of the largest supermarkets in the UK.  It was almost always the same time of the evening/night they put out the deeply discounted food items.

So, how much can you save? 

Savings are going to vary according to what food is put out, and how much the discount is.  The discounted food is usually fresh foods, meat, fish, fresh soups, bread, etc.  The discounts I saw were up to 50% off! 

Many supermarkets have a discounted food isle, this is where tinned, and other non-perishable food are discounted.  Again, discounts can vary.

In using some simple math, if you spend £100 a month on fresh foods, meat, and food stuffs like that, and only save a basic 40%, you are only spending £60 a month.  That saves you not just £40 a month, but £480 a year!

In addition, you get a variety for your menu, you never know what food will be discounted, so you need to be flexible in your eating habits.

Travel:  Many of us have to be to work early in the morning, but there can be a bit of flexibility on this time to work with some employers.

Peak-time for many of the rail lines is early hours of 6:30 in the morning till half 9, then again at 16:00 to 19:00. 

Travelling outside of these times will save your sanity, due to crowded trains, but also save you money. 

My research showed you may be able to save up to 70p per trip, however, some longer journeys the savings was more.

Obviously the use of rail cards can add to this savings, as can other tips, such as buying tickets in advance, or splitting the fares.

Advance purchases of four (4) weeks do help to reduce fairs, but in some instances, if you have multiple legs of your journey, by splitting the tickets you can save even more. 

As to how much you can save, my research showed a ticket from Liverpool Lime Street Station to Brighton, off-peak, mid-week, purchased 4 weeks in advance, costing £40 for a single.  Splitting the tickets, the rail fare was the same £40. 

However, if going from Lime Street station in Liverpool to Bristol Temple Meade, off-peak, and no rail card, the savings was on average £6.  It was £29 to split the fares, slightly higher by not splitting them. 

Even if we just save £1 a day for our commutes to and from work by going off-peak, based on a five (5) day work week, we can save £250 a year!  That is based on a 50 week work year, we have to have our fortnight of holiday:)

Dating and Entertainment:  Here is where we can really save some money, as you can imagine how much we spend on going out, entertaining, and especially dating.

Years ago some companies who had sales executives with expenses accounts, had the accountants go over the books to see how can they save money on their expenses, such as travel, entertaining clients, and lodging.

Two areas, travel and lodging, they were able to reduce some by using corporate accounts, reps travelling only when needed, and only sending one sales person out, when they sometimes sent two.

However, the area they made the largest reduction was in entertaining clients.  Taking clients out for meals, drinks, etc.

So what change did they make?

They went off-peak.

Instead of taking a client out for drinks and a meal, meet for breakfast.  Have coffee, tea, and a full English.  You still can chat, discuss sales, and meetup, but breakfast time, is cheaper that tea time.

Now apply this concept to your life, entertaining friends, meeting up, and also dating.

If you meet up with friends after work for “Happy Hour”, there is some savings there, but meet them in the morning before you go to work, sort of a “Breakfast Club” scenario, or meet for lunch.

Years ago I had a standing order once a week to meet a friend of mine for lunch.  Soon there were three (3) of us, and we alternated paying the bill.

The same can be said of dating.

How many drunken nights of first and last dates did you have.  Meet for a coffee, tea, latte, mid-day.  If the date goes well, make another date for an evening.

If the date is not you wanted it to be, you can soberly, and wallet or purse still full, walk away.

Just keeping the concept of off-peaking in mind, think of all the other ways you can save money, and avoid the crowds.

Cinema tickets are expensive, especially if you want to see the latest and greatest film in 3D. By going to the cinema off-peak and not watching the film in 3D, you can save on average £1.40 for an adult ticket.

If you go to the cinema twice a month, that is a savings of £2.80, which doesn’t sound like much, but it adds up to £33.60 a year.  And that is per person.  Families can save even more.

Yes, Groupon, and vouches and coupons can help with saving money as well, but off-peaking is something you can do on your own.

And regarding popcorn, drinks and snacks at a film, eat at home before you go.  Some parents like to pack snacks for the kids to take in and eat, however, you need to know the cinema’s policy on bringing in your own food and drink.  Many do not take kindly to patrons doing it.

With just the figures we can verify and add up, just by off-peaking you can save well over £700 a year.  And that is not taking into account savings on entertainment, dating, museums, art galleries, etc, that offer cheaper or reduced tickets during off-peak times.

 

Free Banking

In this day and age of online and mobile banking, can you believe that people still pay for banking?!

I mean why would you do that?

There are even banks now that will pay you to switch accounts, and offer cash incentives each month to have your account.

Packaged Bank Accounts:  These bank accounts charge a fee, anywhere from £10 a month to as much as £15 a month to have your money in their banks.

The accounts come with extras, such a life insurance, travel insurance, mobile phone insurance, etc, but many times it can be cheaper to have your own insurance policies.  In addition, if you have a contents policy, or life insurance or other policy covering these items. only one policy is going to pay out.  So why have two.

If you pay £10 a month for a packaged bank account, and switch to a free bank account, you save £120 a year. 

Cash Back Bank Accounts:  Depending on your banking needs, and the balances you maintain, and how many direct debits you have a month, some backs are offering not just money to switch banks, but also cash back in your account each month. 

Depending on your banking habits, you could earn over £300 a year!

Free Cash Points:  I realize that in many parts of the country, ATM’s and cash points are disappearing, especially as we move to a more cashless society.  But paying to access one’s own money is madness. 

Many of these cash points that charge a fee can charge anywhere from £1, to £1.85.  If you use one of these and pay a fee of £1.50 just once a week, that can add up to £78 a year! 

If you couple paying for an ATM, with a packaged bank account, it could be costing you £198 each year.

Just another amazing way to save some money.

 

To The Last Drop

Water, it is the essence of life so they say.  It also is a commodity across the globe.

You may pay your water rates monthly, every six (6) months, or annually, but you still pay them.

It is difficult to estimate the average person’s water usage, but it is estimated at 80 to 100 gallons per day.  Per day!

The cost per household will vary according to region and usage, but it is estimated to be around £400 a year.

This also can vary due to the fact that some households have water meters, and some do not.

A single person in the NW without a water meter may be allowed unlimited water usage, but they will pay £39.05 a month for this. That is £468.60 per year.

It would be cheaper for them as a single person household, to switch to a water meter.

Larger households benefit from the lack of a water meter, as there is no way to track usage, although their rates may be slightly higher.

There are two parts to our water bills:

  • Water usage
  • Sewage Usage

As to how to uniquely save money and save water, will depend on if a water meter is best for your household, or if a meter is not the best way.

It obviously will depend on if a meter has already been installed or not.

Those properties without a water meter can have one installed for free, and you then have a period of time to decide if the meter is of a savings or not.  And you can switch back to not having a meter, sometimes even up to two (2) years after getting the water meter.

That’s a pretty good deal.

So let’s say you have a water meter, and want to save money on your water bill, there are a few ways to do this, and some may seem a bit odd.

Save Water in The Toilet:  Every time you flush the loo it costs you money.  On average is costs 1.5p for each flush.

Baths can cost average 15p, washing laundry 11p.

You can see it doesn’t take long for all this to add up over the course of a month.

We have been told that taking showers uses less water, and the old joke that showering or bathing together can cut your water cost in half.  And there is truth to this jest.  But saving water with the toilet, how?

Years ago there was the suggestion of placing a brick in the back water tank of the loo, so less water was taken back in.  This is a good idea, but one that today’s loos, with their sealed tanks, may not be a practical one.  However, if you have an older loo, the brick trick works.

Flush Every Other Time: OK, so maybe not for everyone, but not flushing the toilet each time you go, can save you money.  There is an old saying, “if it’s yellow let it mellow, and if it’s brown flush it down”.

Again, maybe not for everyone.

But if you flush on average 5 times a day, that is 1.5p X 5 = .75p per day, or £22.50 a month (based on 30 days), or £270 a year

Obviously this may seem high, but factors such as children, how much time is spent working or outside the home, holidays, etc, will all affect this figure.

But if you cut your flushes in half, you can save over £100 a year.

Then there is another way to cut your flushes a week bit, wee in the shower.  I know some will say disgusting, and others will say, I am already doing it.

Just a way to reduce water consumption.

 

The Rounding Up Method

The rounding up method is an old, tried and tested way to save money.  It is not saving money in a sense of not spending money, but by using some unique accounting method to put money aside, so that you are saving.

The way the rounding up method works is like this:

For every purchase you make with your debit card, you round up that purchase in your cheque book ledger.

If you buy petrol and it costs you £23.50, you round up to £24.00.

If you purchase lunch, and it costs you £4.25, you round up to £5.00.

Between these two purchases alone you now have an extra £1.25 in your account.

By doing this for a period of time, say a year, you will be amazed at how much extra you have in your account.

I tried this and had £50 in six (6) months.

If on average you use your debit or bank card 20 times a month, and the average rounding up is 40p, that is £96 a year.

And for many people the average rounding up may be more, and they may use their bank cards more often.

This is just an easy, and can be a fun way, to save money.

 

Potty Train Your Cat

We love our pets, but in the end the love you give and get, can cost dearly, and with cats one of those expenses is kitty litter.

Some households spend £10 or more a month on cat litter.

So why not potty train your cat!

Cats are very clean animals, and also picky about where they do their business. And even if you have a cat that you allow to roam outside, it is still going to need a litter tray to go inside.

And if you have two or more cats, the expense and chose of cleaning the tray, can add up.

So potty train your cat and save £120 a year, if not more!

So how did we do in saving money using these unique techniques for a period of one (1) year??

Off-Peaking:  Savings can vary amongst people, but a good average can be as high as £700 per year, or more! 

Free Banking and ATM’s:  If you are paying for your bank account, and use cash points that charge a fee, you could save up to almost £200 a year!

Reducing Water Rates:  Bathing and showering together, not flushing the loo, all ways to save on water rates, but again, how much you’ll save depends on the size of your household, if you have a water meter or not, and how much of these ideas you embrace, but it is possible to easily save £100 or more each year.

Rounding Up:  No real surprises again, it can vary according to how many times you use your bank or debit card, and the average sale.  However, you should be able to save £75 to £100 easily. 

Potty Training Our Feline Friends:  £120, if not more depending on what you spend for cat litter, and how many cats you may have.  

So in total, on average using these four amazing ways to save money, you could be…….drum roll….£1,220 richer each year!

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