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Credit Too Thin? Get to the Core of the Problem

I’ve talked about pizza before in one of my blogs but maybe I failed to mention that thin crust is best. And that the best thin crust I’ve found is at Paesano in Glasgow’s city centre.

In fact, thin is quite often seen to be a good thing. Kate Moss and Victoria Beckham have built careers on it. Steve Jobs’s mission in life was to make his i-things thinner and thinner. And no self regarding espresso would ever want to share saucer space with a fat chocolate mint would it?

No Credit or Thin Credit?

But when I think about my world of work and the people we want help with the products we are developing, thin is not so good. People with “thin files” can find themselves in all sorts of difficulties when they want to secure a loan. A thin file effectively means that you are new to the credit world, without enough credit history to generate a credit score. And without a credit score, many lenders are unwilling to offer credit or they’ll charge higher interest rates and offer less favourable terms.

In the US, everyone knows their FICO score, a type of score on borrowers’ credit reports which assesses credit risk. FICO scores take into account factors in five key areas to determine credit worthiness – payment history, current level of indebtedness, types of credit used, length of credit history and new credit accounts. Thin file people typically end up with a lower FICO score than people with an equivalent risk but a fuller, fatter file. And importantly, whilst the lender uses the FICO score to drive their decision to accept or reject a loan, they also use it to set the price or rate of the loan. And clearly, the people with thin files are going to pay more.

This is useful stuff to know, as the importance of the FICO score for both lenders and borrowers – and particularly for borrowers with thin files – is increasingly relevant not just in the US but in the UK and many other countries around the world.

How do You Get a Thin File?

So a thin file can create significant problems for a borrower and it’s more common than you think. You can have a thin file for a number of reasons. You may simply be young and not used a credit card yet. You might have been working overseas or been in the armed forces, stationed in different parts of the world over a number of years. You may be in your 60s or 70s and chosen not to be very credit active previously. Women whose husbands have been responsible for the mortgage payments are traditionally another sector of the population who can end up with thin files.

And as globalisation continues to be the way the world does business, there’s an increasing number of executives getting trapped with thin files. Executives from large banks, credit card companies and consultancy firms – people we meet across the boardroom table every week – these people work on a global basis and obviously earn good money. However, when they move to a new country they struggle to even get mobile phone contracts for their family because their file is thin.

You only have to google “thin file” online to see that there’s a whole swathe of the population disenfranchised from the credit market and a range of experts and websites suggesting ways to build up a credit history and fatten up the file. It’s all quite possible to rectify and sometimes even straightforward but it does smack a little of Catch 22. You can’t get credit unless you have already got it!

How do we Balance the Scales?

At least that’s what we think at Castlight and one of the reasons why we have created the Affordability Passport. The Affordability Passport offers a new pathway to securing credit, simply by allowing a customer to share their transactional data directly across any number of accounts with a prospective lender, in real time across our technology platform. Straightaway the lender has access to a categorised break down of income and outgoings, clearly revealing whether or not the customer can afford the loan in question. If the customer has credit performance data, that will be merged with the transactional data, but if the file is thin, then the lender still has all the information he or she needs to make a lending or credit decision.

We believe in empowering financial wellbeing for our clients – whether you’re looking to secure or provide a loan. And we’re determined to deliver it in the simplest way possible. Our Affordability Passport is transparent, fair and fast. Very often, people with a thin file manage their money with exceptional restraint and responsibility. We recognise this and our Affordability Passport is a simple mechanism that lets lenders see this too.

And as the world gets smaller through globalisation, we believe that you should be able to take your Affordability Passport with you when you move to a new country. It is a passport after all!