Millions excluded from financial services because they don’t have a credit history

Financial education gaps mean millions of ‘credit invisibles’ are being frozen out

A person at home calculating their bills (Getty/iStock)

Five million people struggle to access financial products and public services, because there isn’t enough information on their credit record.

These so-called “credit invisibles” include those on low incomes, young people without an established credit score, recent immigrants and expats, and older people who have limited credit and therefore no file, according to data shared exclusively with The Independent by Experian.

There are also big information gaps when it comes to credit scores.

Common misconceptions around credit scores include 73 per cent of people believing a credit blacklist exists, while one in four think credit reference agencies decide whether people are accepted for credit cards.

In the study of 2,050 by Experian, 14 per cent incorrectly believed checking their own credit score could impact it, and 34 per cent thought a previous occupant with a poor credit history could negatively affect their own credit history.

But there is no blacklist, it’s lenders that make decisions based on information on a credit report, and even those with a history of poor borrowing still may be accepted, just with a lower credit limit and a higher interest rate.

Lenders also don’t just rely on a person’s credit score to make a decision, they use information from it along with details on an application form. There is also no universal credit score, each credit reference agency gives a score based on different factors.

The fact so many are confused about how credit scores work, is a worrying sign that they could be negatively impacting their own without realising.

This, combined with the research showing that 5,049,129 have limited or no credit history, means these people could be more likely to turn to more expensive, unregulated options if turned down by mainstream providers because they don’t have a decent credit score.

This is especially important right now, as prices rise on everything, inflation soars, and people are forced to use credit to cover higher prices.

Yet there are some positive signs. When the company first carried out this study in 2017, 80 per cent thought a credit blacklist existed and 32 per cent thought a credit reference agency decided the outcome of a credit card application.

Experian also says through work including the adoption of open banking, the number of people known as credit invisibles has reduced by 750,000 since 2018.

Jose Luiz Rossi, managing director of Experian UK&I, said: “As we emerge from the pandemic, with a cost-of-living crisis confronting us, credit education has never been more important.

“Especially when you look at the results of our consumer poll and see, for example, 73 per cent of respondents thinking there is a mysterious ‘credit blacklist’ that prevents them from getting credit. We have a duty to dispel these myths and promote consumer confidence with credit.”

Along with the pandemic and the current economic situation, part of the problem is also a lack of financial education.

In the last two years, the number of young people who have received no financial education has increased by 17 per cent, according to a separate study of 2,000 16 to 25 years olds for ComparetheMarket and the financial education charity MyBnk.

Prior to March 2020, 67 per cent had received no financial education and this has increased to 84 per cent.

Debt has also increased for this group to an average of £948, from £361, and a quarter of those asked said they feel less confident about managing their money now.

Nearly a quarter said the pandemic meant they didn’t have the opportunity to learn how to manage their money, partly because 37 per cent weren’t able to get a full- or part-time job.

Guy Rigden, chief executive officer of MyBnk said: “The pandemic has made the financial challenge even greater for young adults, especially those from lower-income households who are disproportionately impacted by diminished job prospects and interrupted education.

“Financial education is vital to navigate rising living costs and risks associated with buy-now-pay-later schemes and investing in volatile assets such as cryptocurrencies.”

There are many free financial education resources available. MyBnk has free downloadable financial education programmes for young people in schools and youth organisations while MoneySavingExpert has a financial education textbook that can be downloaded for free.

Many high street banks also provide free resources to help with money management, which aren’t just available to their customers.

There are also lots of ways to improve your credit score and learn more about how it impacts your ability to use and manage your finances. Joining the electoral roll, opening a current account, and making sure some household bills are in your name will all help.

A credit builder card is another option, as is adding your rental payments if you’re a tenant to your credit report.

Organisations including Citizens Advice and StepChange are free to contact for advice with money or if you’re struggling financially.