An article published on the BBC News website yesterday (7thNovember 2022) to mark the launch of this year’s Talk Money Week by the Money and Pensions Service (MaPS) revealed that more 25% of UK adults have less than £100 in savings and that many are too embarrassed to seek help.
Little wonder then that so many people risk relying on expensive credit to fill the shortfall in their household budgets, which can, in turn, push them further into debt.
So what can employers do to improve the financial well-being of their people? First and foremost, they can help by educating them on the ‘dos and don’ts’ of credit. By communicating simple messages they can demystify some of the jargon and build understanding of credit products. Topics could include…
What are the most common types of credit?
- Revolving credit – such as credit cards. This is an ongoing line of credit that’s made available to individuals and they can keep using after they’ve repaid the original sum. As long as the balance of what's on credit is below the agreed credit limit, this can continue to be used as a method of payment for purchases.
- Instalment loans – such as a loan to buy a car. This is a set amount of credit that's made available to individuals for the purchase of a specific item and the agreement ends once the loan, plus interest, has been paid off.
How much credit can I get?
Credit limits are based on previous payment history and the likelihood of the individual repaying the sum without problems. It’s also calculated on the amount of income the individual has. Credit limits are determined by the lender and they use credit agencies to check previous credit history.
What’s credit scoring?
Credit scoring is the rating system used by banks and other financial institutions to help them decide if they should lend an individual money or extend credit terms to them.
The score is a three-digit number that shows how likely the individual is to get credit. The higher the score, the more likely an individual is to be accepted when they submit an application for credit.
What’s a credit report?
An individual’s credit score is based on their credit report – created using information such as:
- A record of current and past financial obligations – loans, credit cards, credit accounts with utility providers, etc. This covers the previous six years.
- A record of missed, late or defaulted payments.
- Any county court judgments or bankruptcies in an individual’s name.
- Information from the electoral register and past addresses.
- Details of any ‘hard’ searches on an individual’s credit file.
- Information from credit reference agencies, such as Experian and Equifax, which hold an amalgamated list of credit searches and history on an individual’s financial history.
How can I check my credit score?
Experian and Equifax both have free tools on their websites for users to check their score, updated once a month. For up-to-the-minute credit scoring, users can subscribe to a paid account, so they can monitor changes to their score in real-time.
Why is it important to have a credit history?
Because lenders use credit scoring and a credit history to assess an individual’s suitability for extending credit, it’s important that a person has some history that can be reviewed. Having credit history can also mean that the individual gets better rates of credit. If they’ve been reliable in making payments in the past, they'll be considered a lower risk and avoid the higher interest rates where the lenders recover more money from the outset of the credit arrangement.
If lenders can see that an individual can be relied on to make payments, they’re more likely to lend the individual higher amounts, for example if they need to buy a home or a car. If an individual has no credit history, then it’s extremely difficult for them to get any form of credit.
In a recent report, Experian highlighted that more than 5 million people in the UK are considered ‘credit invisible’ because there is little or no information about their financial track record. This means that they struggle to access mainstream financial services or they get charged more for credit.
How do I build a credit history or improve my credit score?
If you don’t have a credit history, there are steps that canbe taken to build one, but it doesn’t happen overnight…
DO - get on the electoral roll. The electoral roll helps verify an individual’s name and address to banks and financial institutions.This can in turn help their credit score.
DO - open a bank current account. This will add an account to an individual’s credit report. If managed responsibly, this will positively impact the credit score.
DO - pay off accounts in full every month if possible. An individual making a small purchase using a credit facility could pay it off in full and this positively demonstrates that they are a reliable payer.
DON’T just make minimum payments on credit cards and loans. If an individual has the ability to make overpayments, it will reflect well on them and improve their score.
DO - keep an eye on the credit agency reports. Experian and Equifax both have free monitoring tools. These can also identify anomalies such as fraudulent attempts to take out credit in an individual’s name.
DON’T ignore finances or red flags. Improving credit scores and building history is a medium to long-term process. If there is something that doesn’t seem right, an individual should contact the credit reference agencies to flag it and get it investigated.
DON’T miss payments, ever. Missed or defaulted payments stay on an individual’s credit record for six years. Lenders will search back andany missed payments will significant affect an individual’s ability to get credit.
DO - seek help and support. Impartial advice is available from many non-profit organisations, such as the Money and Pensions Service and MoneyWise.
How can PayCaptain help?
Interest rates are currently at 3% – the highest since November 2008 – and the cost of credit has risen in line with this. Employees paid by PayCaptain can take advantage of its in-built functionality to avoid having to turn to expensive credit solutions.
On-demand pay – Where companies can give their employees access to payments when they need them, even if it’s outside of the regular pay period. Employees can use this to avoid having to turn to credit or expensive loans.
Payment splitting – where employees can make payments direct from their net pay to family members, landlords, loans, credit cards, etc – eliminating risk of missing an important payment. This can help employees improve their credit score and keep their record unblemished by late or missed payments.
Employees can also receive personalised financial guidance through the PayCaptain app. People often feel embarrassed by the fact that they’re struggling with money and believe they’ll be looked down on. With impartial advice, there’s a degree of separation between the employee and the guidance service, leading to a higher level of utilisation and engagement by employees.
In the app, there’s also a money planning tool so employees can set a budget based on their committed outgoings.