Can credit scores make payday lending ethical?

Payday lenders need to work harder to not target vulnerable borrowers.

A new report (pdf) by Damon Gibbons, published in partnership by Friends Provident and the Centre for Responsible Credit, looks at the benefits of credit data sharing and raises another possible solution to the problem of irresponsible lenders targeting the financially vulnerable.

It might be a surprise that credit scoring is not standard procedure for high-cost lenders on the high street and online. But most of us are familiar with payday lenders' adverts promising easy cash with no credit checks. The speed with which hard-up borrowers can obtain very expensive loans does have consequences, and making data sharing a priority would start to set this problem straight.

What does credit scoring and data sharing involve?

Credit scoring, simply put, is the system financial institutions have in place to check whether a person is said to be creditworthy before assessing a loan application. The system, regulated by the Financial Services Authority, works on a points system and is often shared with credit reference agencies. If a person's points score is deemed high enough then their loan application will generally be accepted; otherwise, that loan application can be denied.

How it can benefit responsible lending?

The Office for Fair Trading's guidance to lenders on responsible lending states that a creditor must consider whether a credit commitment will adversely impact upon an individual's financial situation. Ideally, credit scoring and data sharing can help lenders adhere to those guidelines. They will finally have a database to look at which will give them some indication of whether a loan of a particular amount, say, will be beneficial to them or impact negatively on their financial situation.

What bad behaviour it can stop?

At the moment there is no law stopping a payday lender from lending large sums of money, at expensive rates of interest, to low income consumers. There is only guidance to do this, and we know that this is not always adhered to. While we know payday lenders profit from repeat customers, and that only between 50 and 60 per cent of loans from payday lenders are notified with credit reference agencies, even some in the industry say that moving to a culture of data sharing would ensure that the risks attached to lending money are reduced, as well as some of the front end costs.

What are the risks?

The big risk is that credit scores could make it more difficult for a person to obtain credit.

The government, on this, have said that while they appreciate the need for credit scoring, they do take into consideration the “unintended consequences”, such as to those with no, or "thin", credit rating struggling to get loans.

However in addition to better quality lending decisions, it would be worthwhile for mainstream credit providers to be less needlessly risk averse when considering overdraft and credit applications to low income customers who may otherwise rely on a high cost payday lender, where the average loan can cost around £30 per £100 borrowed.

What policy makers should do

Two things: set criteria for what is meant by responsible lending, such as setting a minimum level of disposable income a borrower is left with after taking on a loan; and oblige lenders to refer high risk customers to credit unions, where they can receive budget management advice and borrow money at far cheaper prices.

Furthermore, payday lenders should be obliged to implement a system of five roll-over loans per customer. Credit checks will provide the data for customers who reach this point.

Credit scoring and data sharing, implemented properly, can be the lifeline borrowers need at a time when personal debt is growing and the payday lending sector is seeing its profits soar.

Photograph: Getty Images

Carl Packman is a writer, researcher and blogger. He is the author of the forthcoming book Loan Sharks to be released by Searching Finance. He has previously published in the Guardian, Tribune Magazine, The Philosopher's Magazine and the International Journal for Žižek Studies.

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It's Gary Lineker 1, the Sun 0

The football hero has found himself at the heart of a Twitter storm over the refugee children debate.

The Mole wonders what sort of topsy-turvy universe we now live in where Gary Lineker is suddenly being called a “political activist” by a Conservative MP? Our favourite big-eared football pundit has found himself in a war of words with the Sun newspaper after wading into the controversy over the age of the refugee children granted entry into Britain from Calais.

Pictures published earlier this week in the right-wing press prompted speculation over the migrants' “true age”, and a Tory MP even went as far as suggesting that these children should have their age verified by dental X-rays. All of which leaves your poor Mole with a deeply furrowed brow. But luckily the British Dental Association was on hand to condemn the idea as unethical, inaccurate and inappropriate. Phew. Thank God for dentists.

Back to old Big Ears, sorry, Saint Gary, who on Wednesday tweeted his outrage over the Murdoch-owned newspaper’s scaremongering coverage of the story. He smacked down the ex-English Defence League leader, Tommy Robinson, in a single tweet, calling him a “racist idiot”, and went on to defend his right to express his opinions freely on his feed.

The Sun hit back in traditional form, calling for Lineker to be ousted from his job as host of the BBC’s Match of the Day. The headline they chose? “Out on his ears”, of course, referring to the sporting hero’s most notable assets. In the article, the tabloid lays into Lineker, branding him a “leftie luvvie” and “jug-eared”. The article attacked him for describing those querying the age of the young migrants as “hideously racist” and suggested he had breached BBC guidelines on impartiality.

All of which has prompted calls for a boycott of the Sun and an outpouring of support for Lineker on Twitter. His fellow football hero Stan Collymore waded in, tweeting that he was on “Team Lineker”. Leading the charge against the Murdoch-owned title was the close ally of Labour leader Jeremy Corbyn and former Channel 4 News economics editor, Paul Mason, who tweeted:

Lineker, who is not accustomed to finding himself at the centre of such highly politicised arguments on social media, responded with typical good humour, saying he had received a bit of a “spanking”.

All of which leaves the Mole with renewed respect for Lineker and an uncharacteristic desire to watch this weekend’s Match of the Day to see if any trace of his new activist persona might surface.


I'm a mole, innit.