5.3 Accessing debt products

A crucial factor in being able to access debt products is the credit standing of the borrower. People with poor ‘credit scores’, even if they have relatively high incomes, will have limited access to cheaper forms of debt. Most lenders ‘credit score’ loan applicants before releasing money. Although the exact practices vary from lender to lender, the credit score analysis can be broken down into four main areas:

1. Factors which might automatically prevent approval: For example, if the individual has a County Court Judgement (CCJ) – or a decree in Scotland – against them for previously defaulting on debts.
2. Affordability testing: This looks at the income and prevailing expenditure commitments of applicants, with an emphasis on existing debts.
3. Characteristics of applicants: For example, how long someone has lived at their current address (and at previous addresses), and how long they have maintained their current banking arrangements will be scored. Frequent changes of address and banking arrangements attract unfavourable credit scoring.
4. Security: This relates to the importance of security in deciding the level of risk and the interest rate.

The range of outcomes from this process is more than just a ‘yes’ or a ‘no’. It also determines the maximum the lender is prepared to advance and the interest rate charged. Moreover, it can involve the lender making use of the credit reference agencies (CRAs) that provide databases on the credit histories of individuals. Those seeking to borrow have the right both to ask if a CRA was employed by the lender and which CRA was used. For a small fee (£2 per file in 2010), anyone can ask to see their statutory credit report from the major CRAs (Experian, Equifax and Call Credit). For many households, the reality of the financial crisis at the end of the 2000s was that access to mortgages and other debt products became increasingly difficult to obtain. Lenders tightened up their ‘credit scoring’ processes and shunned more risky types of business. The latter could include those with a poor credit record and where inadequate security was being provided (for example, in the form of property value with respect to mortgages).

As part of any review process (such as Philip’s decision as to which debt product to use), it’s important to be able to tackle problems with debt if they arise. To where do people with debt problems turn if they get into difficulty? The nearest Citizens Advice Bureau (the local branch of Citizens Advice, whose research has been drawn on throughout this course) is one organisation which helps people with such problems. Other organisations include the National Debtline and the Consumer Credit Counselling Service. It can also be important to contact a lender and tell them about problems with repayment. Box 7 gives an example of the kind of tips for dealing with debt that are available from many organisations without charge – in this case from the OFT (2005).

Figure 12 Debt advice could be obtained from the Consumer Credit Counselling Service or from a Citizens Advice Bureau

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There are two images. The first reproduces the home web page for the Consumer Credit Counselling Service, a charity giving free advice on dealing with budgeting and debt problems. People can click on various links to find out what help is available. Those who have used the service before can input their reference number and password to gain access to their records. The second image is a photograph of the outside of a Citizens Advice Bureau. The office has a large shop front sign with the name ‘Citizens Advice Bureau’. A woman is leaving the building.

Figure 12 Debt advice could be obtained from the Consumer Credit Counselling Service or from a Citizens Advice Bureau