Credit scores are meant to be a reliable way to gauge a person’s likelihood of repaying a debt. Lenders use them to determine whether to extend credit to you and, if so, how much interest to charge. But could the current credit score system be flawed?
According to a new study, almost half of Britons think the current credit scoring system is not fit for purpose. Let’s find out why this is the case, whether the current credit scoring system needs to change, and what you can do to take control of your financial future.
Credit score system: what do the British think?
According to a MyLifeKit and Censuswide poll, 54% of UK adults aged 18-34 think the current credit scoring system is fundamentally flawed. A significant proportion (44%) of respondents aged 35 and over also share this sentiment.
Overall, 46% of adult Britons agree that the current credit scoring system is inefficient.
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 five years ago.
Meanwhile, 38% believe their credit scores don’t accurately reflect their current lifestyle or livelihood. Credit scores, according to 34% of people, do not accurately reflect a person’s creditworthiness.
The fact that you receive a bad credit score if you have a limited credit history is one of the main reasons why the credit scoring system is considered faulty, 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 is really fair to judge people’s creditworthiness, and therefore their eligibility for financial services, solely on the basis of their financial history. At a time when enriched data about people is widely available, he believes the current credit system should be overhauled.
He explains, “We need to start seeing a shift in how the financial, healthcare and retail sectors deploy enriched data to determine an individual’s creditworthiness.
“Said data could include context relating to their lifestyle, health, fitness, and the broader environment and economy, all of which are already tracked and observed by consumers and businesses.”
How can you take control of your financial future in the meantime?
As a consumer, there is little you can do to change the current credit score system. Until the system is updated to account for the enriched data, 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 some ideas to help you do that.
1. Register on the electoral lists
Being on the voters list 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 on time will lead to a positive payment record which can help improve your score. It will also help you avoid late fees.
One of the best ways to make sure your bills get paid on time is to set up automatic payments.
3. Keep your credit utilization rate low
Your credit utilization rate is the total amount of your available credit that you are using.
Lenders view a low credit utilization rate as a positive, which can improve your score. As a general rule, you should aim to keep your credit utilization ratio below 30%. So if you have £1000 in credit, try not to use more than £300.
4. Apply for a credit-builder card
A credit card is intended to help people with limited credit histories or low credit scores improve their situation. The card usually 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 increase over time.
Does this sound like something that might work for you? Check out our list of top rated credit cards for bad credit to get started.
5. Regularly check your credit report for any errors
Credit report errors could negatively impact your score. Get in the habit of reviewing your report regularly so you can note and take action to correct errors.
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