Credit ratings: Borrow yer money and take yer chance

Payday loans reveal the peculiarities of our credit ratings. But what are the long-term implications of these short-term fixes?

I don't know what I expected to find at The Money Shop, but I suppose I did have one unexamined assumption: that the people using it would have something obvious in common. Payday loans are not easy options: even if it was just a glint of worry in the eye, I thought, there would be a hint that they were all in the same boat. It's a bit shaming that I intuited this. And it is, of course, not the case.

At the north London branch of the chain where I loitered on Friday, customers come in all varieties. There's a young mum and a guy in a tracksuit and an impeccably turned out white-collar gent carrying a bunch of flowers. They are understandably reluctant to speak about their reasons for being there, but eventually a woman in her mid-thirties whom I'll call Lucy stops to talk. Considering the recent national hand-wringing over the dangers of payday loans, she is remarkably sanguine about the £200 she is borrowing for a couple of weeks to buy her boyfriend and her nieces their Christmas presents – for which she will pay a premium of more than £50.

She is not unusual. According to the Money Advice Service, more than a million people will take a payday loan to help cover the costs of the season. "I never have money problems," Lucy explains. "But I had to get the plumber in twice this month and it's left me a bit short. So this is good for a quick fix."

Lucy isn't worried, and perhaps she needn't be. On the other hand, the getting of the loan is, in general, the easy bit. More domestic difficulties and she might feel a little differently. Indeed, the Money Advice Service also says that one in 10 people are still paying back Christmas debt from last year. And, as the Government finally promises to act on the issue of the payday market and put a cap on the overall cost of the borrowing, it is worth remembering that the consequences of a short-term loan are not limited to your repayments, and do not exist in isolation.

That brand name, "The Money Shop", is a little unnerving. It reminds us of the essential weirdness of a loan: a means of buying money with money. Everyone understands this, and when we weigh the most obvious part of the transaction – the assessment of your trustworthiness by the analysis of your financial affairs – we tend to agree that it makes sense. The part that should give us pause is the part that we don't think about so much: a loan is not merely a gauge of your creditworthiness. It can also significantly shape it for the future.

Last week, the BBC's Newsnight programme claimed that two-thirds of mortgage brokers say they have had clients turned down after they took out a payday loan. Because it's easier to take out a few in quick succession than it would be if you were borrowing in a more conventional way, it is also easier to do significant damage to your future prospects of getting a loan.

It's such a weird business, credit, when you unpack it. And it's one that many of us don't think about nearly enough. "So many people aren't aware of it," says James Jones, head of consumer affairs at the credit reference agency Experian. "People might see a story about credit, like this, in the paper and think, oh, I'm fine, and move on to the next article. But, actually, it is more and more important for more and more people."

Jones runs an agony-uncle service answering people's questions about credit on the Experian website: a quick skim of the questions suggests that many of us are baffled about the opaque workings of the credit system. "Getting on the electoral roll can help your credit," Jones says, by way of example. "And, if you have joint credit with a partner and then break up and don't sever those links, we don't know about it, so your credit could be affected in the future."

This is the strange contradiction of the credit system: your most intimate information is being used to create a version of you that can ultimately only be an imperfect model, and one that is always a little out of date. The credit agencies know spooky amounts about you but also nothing at all. It feels like information that should belong to you; that the data which decides your financial fate is in the hands of other people, often out of your immediate reach, seems a bit like going to the doctor and learning that you are going to die, but then being informed that the diagnosis is proprietary. Credit is a more important fact of life for more people than it has been for a long time. And yet our understanding of it has barely begun to catch up.

Consider, for example, the cautionary example of Ellen (not her real name), a 25-year-old brand manager who needed to get a car for her work. Well paid for people her age and confident that she had always paid off her debts on schedule, she applied for a car loan with every expectation of getting it – and was appalled to be told that her credit rating wasn't good enough. Eventually, she discovered the cause: the forgotten store cards she had used as an 18-year-old student. The sums involved were small but they also created a record of unreliability. "I remember speaking to the credit agency over the phone and just crying, and just the regret – I had no idea that it would affect me so badly," she said. "When I was a teenager I didn't know the first thing about credit. I was so naive."

To fix the problem, she took advice about the best way to improve her credit score: get a new credit card and use it to make a single purchase of £60 or so, and then, rather than pay it all off at once, make the minimum payment and gradually wipe the debt out over many months. That way, even though she would be in debt for longer, she would also demonstrate her reliability. There's a certain logic to this, but it still seems completely mad. "It's the ultimate game of hard to get," agrees Ellen. "You have to show them you'll pay it back, but not right away. Dating is so much easier." She got there in the end, but Ellen now subscribes to monthly updates on her credit score. And she doesn't have any store cards.

Ellen is not alone in her caution. Young people, a recent study found, are significantly less likely to have credit cards than their older peers. And if that means more of us are learning to live within our means, it may be no bad thing. When it comes to credit, being on your guard seems to be the only sensible posture to take. Mysterious as the system is, it is otherwise very hard to be sure of where you stand. Perhaps that is why everyone in The Money Shop seems so cheerful: the ignorance. You might be quite right to feel confident about paying the money back. But the system is never going to believe you.

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Guru Careers: Financial Controller

    £45 - £55k DOE: Guru Careers: A Financial Controller is required to join a suc...

    Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

    £12500 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

    Recruitment Genius: Sales Adviser - OTE £24,500

    £22500 - £24500 per annum: Recruitment Genius: Inbound and outbound calls with...

    Recruitment Genius: Business Development Executive / Sales - OTE £40,000

    £18000 - £40000 per annum: Recruitment Genius: This fast growing Insurance Bro...

    Day In a Page

    Mullah Omar, creator of the Taliban, is dead... for the fourth time

    Mullah Omar, creator of the Taliban, is dead... for the fourth time

    I was once told that intelligence services declare their enemies dead to provoke them into popping up their heads and revealing their location, says Robert Fisk
    Margaret Attwood on climate change: 'Time is running out for our fragile, Goldilocks planet'

    Margaret Attwood on climate change

    The author looks back on what she wrote about oil in 2009, and reflects on how the conversation has changed in a mere six years
    Oculus Rift and the lonely cartoon hedgehog who could become the first ever virtual reality movie star

    The cartoon hedgehog leading the way into a whole new reality

    Virtual reality is the 'next chapter' of entertainment. Tim Walker gives it a try
    Donovan interview: The singer is releasing a greatest hits album to mark his 50th year in folk

    Donovan marks his 50th year in folk

    The singer tells Nick Duerden about receiving death threats, why the world is 'mentally ill', and how he can write a song about anything, from ecology to crumpets
    Twitter accused of 'Facebookisation' over plans to overhaul reverse-chronological timeline

    Twitter accused of 'Facebookisation'

    Facebook exasperates its users by deciding which posts they can and can’t see. So why has Twitter announced plans to do the same?
    10 best waterproof mascaras

    Whatever the weather: 10 best waterproof mascaras

    We found lash-enhancing beauties that won’t budge no matter what you throw at them
    Turkey's conflict with Kurdish guerrillas in Iraq can benefit Isis in Syria

    Turkey's conflict with Kurdish guerrillas in Iraq can benefit Isis in Syria

    Turkish President Erdogan could benefit politically from the targeting of the PKK, says Patrick Cockburn
    Yvette Cooper: Our choice is years of Tory rule under Jeremy Corbyn or a return to a Labour government

    Our choice is years of Tory rule under Corbyn or a return to a Labour government

    Yvette Cooper urged Labour members to 'get serious' about the next general election rather than become 'a protest movement'
    Singapore's domestic workers routinely exploited and often abused in the service of rich nationals

    Singapore's hidden secret of domestic worker abuse

    David Cameron was shown the country's shiniest veneer on his tour. What he didn't see was the army of foreign women who are routinely exploited and often abused in the service of rich nationals
    Showdown by Shirley Jackson: A previously unpublished short story from the queen of American Gothic

    Showdown, by Shirley Jackson

    A previously unpublished short story from the queen of American Gothic
    10 best DSLRs

    Be sharp! 10 best DSLRs

    Up your photography game with a versatile, powerful machine
    Solved after 200 years: the mysterious deaths of 3,000 soldiers from Napoleon's army

    Solved after 200 years

    The mysterious deaths of 3,000 soldiers from Napoleon's army
    Every regional power has betrayed the Kurds so Turkish bombing is no surprise

    Robert Fisk on the Turkey conflict

    Every regional power has betrayed the Kurds so Turkish bombing is no surprise
    Investigation into wreck of unidentified submarine found off the coast of Sweden

    Sunken sub

    Investigation underway into wreck of an unidentified submarine found off the coast of Sweden
    Instagram and Facebook have 'totally changed' the way people buy clothes

    Age of the selfie

    Instagram and Facebook have 'totally changed' the way people buy clothes