A new year brings fresh challenges for those already struggling with their finances, especially during a fierce cost of living crisis.
In March 2023, it was reported that family debt in the UK had surged past £2trn for the first time ever, with people turning to credit cards to stay afloat. This is likely to grow in the coming months.
At the end of July 2023, the FCA’s Consumer Duty came into effect, offering beleaguered Brits some real hope. The new rules have been implemented to drive better outcomes for consumers, and the FCA is now actively monitoring how financial firms are responding – and will take action against those that aren’t following them.
For example, the FCA has recently written to investment platforms and self-invested personal pension operators setting out its concerns about the way they are dealing with any interest earned on customers’ cash balances. They’re watching things very closely.
The new regulation should ultimately ensure that financial services providers become increasingly focused on delivering positive outcomes for customers. However, there is a considerable segment of the credit market that isn’t always delivering true value.
The problem with building good credit
Having a good credit score is life changing. For many, it opens the door to opportunities they would never have been able to access otherwise, whether it’s getting a mortgage or buying a new car.
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Unfortunately, millions of people across the UK have a low score and thin credit file, and this is leaving them with fewer fair and affordable options when it comes to securing that much-needed loan.
Credit provides a lifeline for many as long as providers are lending responsibly. Whilst the majority of lenders embrace transparency, it’s concerning that there are numerous “credit builder” credit cards coming to market which promise to help boost a user’s score but are unlikely to lead to a good outcome for many consumers. It’s estimated that around four million people in Britain now have a credit card specifically aimed at those with a poor credit rating. But these cards can have particularly high interest rates, often over double the rate of standard credit cards.
While some alternative credit builder services offer a valuable service, others have sprung up charging fees to deliver spurious results or to manufacture artificial loans.
In a consumer duty focussed environment, the larger players in the credit space are beginning to rightly tighten up on this. As we enter a new year, I would expect to see the less responsible players in the credit builder market face significant challenges. It may be that the credit reference agencies simply decide to stop accepting submissions from these products. It’s also likely to be part of a broader area of interest to the regulator, alongside other products not delivering value to consumers
With mainstream lenders tightening their lending rules to meet their own Consumer Duty requirements, a squeeze on dubious credit builders will be especially timely. We’re going to see an increase in people using credit builder products as they try to improve their chances of being approved, so honesty, transparency and value need to be the focus.
Shifting the dial from credit to debit
Regulation can only do so much and go so far. To genuinely improve consumer outcomes over the long term, financial services firms will need to innovate and create new products suited to these difficult times.
That’s why we’re disrupting the market through BuildMyCreditScore, a new solution which has been specifically designed to empower users to build their credit scores simply by spending directly from their bank account on their daily shopping and other everyday items.
Traditional credit builder products rely on someone making prompt repayments on expensive credit that they have taken out. If they fail to do so for any reason – which is more likely in today’s volatile economy – they risk falling into debt and further harming their credit score. It’s a damaging, vicious cycle.
We’re now shifting the dial from credit to debit. Developed using the same infrastructure as Currensea, BuildMyCreditScore links securely to a user’s existing current account via open banking technology, allowing them to spend directly from that account. The debit card is designed to be used in place of someone’s usual card for small, regular purchases.
Whilst these transactions go through immediately like a regular bank debit card, the money is actually collected some days later via direct debit, demonstrating a consumers ability to responsibly manage rolling outgoings. They can therefore build their credit score without the risk of a credit card.
So, whether it’s someone who has recently moved to the UK, an 18-year-old who has never borrowed money before, or someone who has previously been declined for a credit card, this new approach to credit builder products will offer them a timely lifeline.
James Lynn is CEO and co-founder of BuildMyCreditScore and Currensea