Losing Credit: Outdated Assessments Push UK Consumer Debt Off Track

Among growing concerns about high consumer debt levels in the UK, a new study finds that almost a third of credit card and personal loan debt – up to £35bn – is sitting with people who are deemed to have low financial maturity. Aire, which uses Artificial Intelligence (AI) technology to help lenders provide applicants with more accurate credit assessments, found that only 59% of UK adults show good signs of financial maturity in a basic test that underlines the need for a better understanding of credit applications.

The insight drawn from the “Credit where credit is due: scoring the right balance in today’s economy” report shows that every second person in the UK currently holds some form of consumer credit. 41% of UK adults have credit card debt and 13% have taken out personal loans. At the same time, 12% use credit to pay for domestic appliances (white goods), while 1 in 10 currently own their car through a leasing contract.

The report also identifies striking gaps in the way that consumer credit is awarded, with Brits being subtly encouraged to take out more credit than they can easily afford. According to the findings, up to £20bn of credit card and personal loan debt in the UK is held by people who have had to dip into an unauthorised overdraft over the past 12 months – a sign that there could be difficulties in managing finances for this group.

At the same time, freelancers, the self-employed and gig economy workers often find it hard to gain credit as they aren’t able to fulfil traditional credit assessment metrics. In light of this, the report shows that freelancers have only increased their credit card and personal loan debt by £399 over the past 2 years, compared to a national average of £548. Conversely, Aire found that 56% of freelancers show good signs of financial maturity and these freelancers are planning to take out an average £331 in credit card debt and personal loans over the next two years – though it is likely they will face harder barriers in applying for this credit because of their work status.

Separate to these findings, earlier this year Aire announced new partnerships with popular lending platform Zopa and world-leading car finance business Toyota Financial Services (UK) PLC. The two companies will be using Aire’s AI technology, which is able to analyse the full picture of applicants with a special focus on affordability and character traits, such as financial maturity. This helps lenders and high street banks better understand a wider range of credit applicants, many of whom have thin-file credit histories such as first-time borrowers and self-employed or freelance workers. The partnerships with Aire make Zopa and Toyota FS pioneering lenders who have chosen to tackle the issue head-on.

Painting a broader picture, Aire’s research among 2,000 UK adults, which was conducted by independent research company Populus, shows that consumer credit is an increasingly popular form of financial support for young British families. Over the past two years, people with children increased their credit card and personal loan debt by £566 compared to only £538 for those living without children. Credit rose especially for those in low-income employment: while the national average was £548, people in households with an annual income between £15,000 – £20,000 increased their debt by £700.

Looking to the future, the affordability squeeze is predicted to tighten further as Brits across almost all social grades are expecting their debt to rise faster than their income over the next two years.

Aire’s founder and CEO Aneesh Varma commented:

“This affordability squeeze means that even if some people manage to pay down their debt, they will have to make drastic cuts elsewhere and face financial distress in the process. This hurts the economy in multiple ways beyond the financial services. We can get ahead of this by enhancing credit assessments across the ecosystem by deepening our understanding of an applicant’s capacity and character. And for once, technology allows us to solve this. Everyone can be better off.”