Simon Read: Catch 22 for borrowers who are turned down by banks

There are many reasons for people to turn to high-cost credit, but being turned down by their banks for a loan is one

The FCA has imposed £1.1bn in fines on five banks over forex trading practices (Reuters)

Here’s a novel idea: if you borrow money and repay it in full and on time, you should qualify for lower rates next time you borrow. That’s because you’ve demonstrated that you’re a decent risk for the lender.

That’s more or less the way the credit industry works. If you apply for a loan or credit card, the rate you’ll be charged will be determined by a number of factors that make up what they call your creditworthiness.

The more credit you’ve taken on – and repaid – the more creditworthy you’ll be deemed to be.

But that model doesn’t apply to those at the bottom end of the market. There’s no reward for the hard-up who struggle to get by each month and are forced to resort to short-term credit such as payday loans.

That should change, reckons John Gathergood. The economist this week gave evidence about payday lending to the Treasury Committee looking into the treatment of consumers by financial service companies. He said the market should focus on borrowers.

“What we want to see is more like a credit ladder, where the first loan may be expensive but subsequent loans should be cheaper,” he said.

There are many reasons for people to turn to high-cost credit, but being turned down by their banks for a loan is one.

The long-term aim must be to get struggling people back into mainstream affordable credit and out of the clutches of high-cost lenders. Professor Gathergood’s proposal should be given close scrutiny by the authorities.