In Focus Collections
Leigh Berkley Director of external affairs and development, Arrow Global Group
As part of Debt Britain, we really wanted to ask how we could improve recognition of debt repayment. So we started to look at how consumers’ credit scores would improve – or not – if they actually started to pay back debt. We analysed a sample of 20,000 of our
own customer accounts to assess how much, and how quickly, consumers’ credit scores improve when they start repayment plans or settle a debt.
Proper recognition Debt defaulters benefit from a marked improvement to their credit score once they have fully repaid, or partially settled, a problem debt – the average improvement was 3.8% and the biggest improvement was for those who started on a lower credit score – they would see an improvement of about 11%. However, debt defaulters, who start a
repayment plan, see only a very marginal improvement to their credit score at first, compared with non-payers – only 1.8% on average after quite a period. And to put that into context, even the non-payers saw a 1.4% improvement! So there is virtually no recognition of the fact that people might have been paying us
for six or 12 months. I could see a housewife in Durham who had been paying us every month for four years and her credit score would hardly change.
Possible solutions We felt that was wrong, so we started to look at some possible solutions. I do emphasise that these are only possible solutions, because the ethos of Debt Britain is very much to start the debate, not lead it. We are bringing stakeholders together
from the industry because, while a traffic- light system is not the only approach, we think that it would have the merits of being simple for the consumer and giving them definite motivation to go from red to amber and then to green as quickly as possible.
Communicating clearly From our survey, the majority of consumers think that creditors communicate very clearly with them – 69% said that banks or other creditors were either clear or very clear in their communications. However, there are no grounds to be complacent and plenty of room to improve: around one in five still thought that communication from creditors was either unclear or very unclear, and only 41% told us that their credit score was clear and easy to understand, with 36% saying that it was not. Clearly we have made substantial progress
There is an obvious perception gap when it comes to debt rehabilitation that must be addressed. One in five consumers think that missed payments either have no impact on their credit score, or a positive impact
as an industry – for example, it is now advertised on the television where consumers can go to access their score for free. So I do feel that the average consumer is much more aware of this, but, clearly there is more work that we can all do together. From the reference agencies’ point of
view, credit scores are not well understood. However, consumers generally agreed that credit scores are a good way to decide who gets access to credit. In total, 55% said that they were a good way to decide and only 25% said no. So people do think that credit scores, if
they are accessible and easy to understand, are a good way of having their credit decisions judged.
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www.CCRMagazine.co.uk
Perception gap There is an obvious perception gap when it comes to debt rehabilitation that must be addressed. One in five consumers think that missed payments either have no impact on their credit score, or a positive impact. A worrying proportion thought that a
borrower’s credit score should immediately improve significantly when setting up a repayment plan. There were some quite shockingly
unrealistic expectations of how quickly credit scores return to normal once someone has started to repay their debts. The average was that people thought their score should improve significantly after only eight months of paying.
Traffic lights As one potential solution to these issues, traffic lights systems are popular with consumers: 78% of responders said they would find the traffic light system proposed in Debt Britain either helpful or very helpful. So four out of five consumers considered that it would be a good idea.
January 2017
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