Understanding customers with adverse credit

Paul Adams of Pepper Money explores the misconceptions about customers with adverse credit and the impact of Covid-19 in this Structured Learning Article.

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Paul Adams Pepper Money
|
10th February 2021
debt credit card finance money worries

The learning objectives for this article are to:

  • Explain the factors that affect the growing number of people with adverse credit on their credit file
  • Be able to describe how COVID has impacted the finances of customers with adverse credit
  • Be able to tackle customer misconceptions about securing a mortgage when they have adverse credit

Last Autumn, Pepper Money commissioned YouGov to carry out a study into missed credit payments and their impact on securing a mortgage. The research was carried out at a time when lockdown restrictions had been relaxed in much of the country and the property market was reported to be booming.

It was also a time when millions of people were still furloughed by their employer, the country had officially entered recession and there were several question marks about the long -term impact of the pandemic on employment and the economy.

So, what did we learn?

Our research has estimated that there were 1.09 million people in the UK with adverse credit who were looking to buy a property in the next 12 months.

According to the research, 13% of all participants surveyed had missed payments on credit commitments; had CCJs, defaults, secured or unsecured arrears registered on their credit file; or had entered a Debt Management Plan in the last 3 years.

Based on the latest ONS projection for the UK adult population of 52.4 million this meant we were able to estimate the number of people considered to have adverse credit to be 6.81 million.

Of these 6.81 million people with adverse credit in the last 3 years, 16% said that they intended to purchase a property (to live in or let out) in the next 12 months. This equates to 1.09 million potential mortgage customers with adverse credit, who may need the support of a broker.

The impact of COVID

The research found that COVID-19 has had a more significant impact on those people who have experienced adverse credit in the last 3 years than the population as a whole. More than a third (35%) of people who have adverse credit said the amount of debt they have has increased as a direct result of COVID-19, compared to a quarter (25%) of people overall.

And 37% of people with adverse credit said their income had decreased as a direct result of COVID-19, compared to 25% of people overall. Of those with adverse credit whose income has decreased, 26% said it fell because they were furloughed, 18% had lost income through self-employment, 17% had lost their job, 15% said their income was reduced by their employer and 6% experienced a reduction in income as a result of being unwell and taking statutory sick pay.

Understanding adverse credit borrowers

According to the research, 51% of adults who have experienced adverse credit in the last 3 years are from the less affluent C2DE social grade, while 49% are from the more affluent ABC1 social grade.

The 35-44 age group has emerged as the most common for people who have experienced adverse credit in the last 3 years, with 29% in the group compared to 23% aged between 25-34, 20% aged between 45-54 and 19% aged 55 and over.

There has been a slight upward trend in the amount of debt (excluding mortgages and student loans) held by adults with adverse credit in the last 3 years. In the previous wave of research carried out at the beginning of 2020, 36% of the group said they had debt of more than £5,000 and in the autumn report that number had increased to 40%.

Misconceptions about adverse credit

The research tells us that 69% of adults with adverse credit in the last 3 years, who are looking to purchase a property in the next 12 months with a mortgage are concerned about having their mortgage application declined due to their credit history.

However, only 7% of homeowners who had experienced adverse credit before buying their current property say their adverse credit resulted in a declined mortgage application.

There remains therefore a significant perception gap, between the number of people who believe that adverse credit will result in a declined mortgage application and the number of people for whom this has actually been the case.

This misconception about the impact of adverse credit on the ability to successfully apply for a mortgage is demonstrated by incorrect attitudes to the impact of a CCJ. More than a quarter (27%) of people surveyed said they would have to wait longer than 5 years to apply for a mortgage after being registered with a CCJ. However, the reality is many lenders are able to offer competitive mortgages to customers who have been registered with a CCJ as little as 6 months ago.

Current homeowners with adverse credit

Almost half (48%) of adults with adverse credit said that it did not affect their ability to get a mortgage to buy the home they currently live in.

Looking at the ways that adverse credit did impact their mortgage application, 15% said that it reduced the options of mortgages available to them and 17% said they had to use a mortgage broker. 15% thought it made the process of applying for a mortgage longer, whilst 18% were asked to supply more paperwork than normal when applying for their mortgage. 10% of respondents surveyed had to pay a higher rate on their mortgage and only 7% were declined for a mortgage the first time they applied.

Conclusion

As we begin to emerge from the pandemic and exit the government schemes that have provided a safety net for so many, it is likely that we will see more people whose financial lives will continue to be shaped by COVID-19 and become more complex in the process.

It is more important than ever that we ensure these people are not disenfranchised from mortgage lending because of their credit history, but that they are given a fair opportunity to access the market based on their current circumstances and future ability to make payments.

Professional advice is the key to achieving this, and while we have seen some improvement in the number of people who would seek the advice of a mortgage broker, there are still many who are anxious their mortgage application will be declined, and there continues to be a significant perception gap between the number of people who believe that adverse credit will result in a declined mortgage application and the number of people for whom this has actually been the case.

It is important therefore that we continue to encourage awareness and open discussion about credit problems and adverse credit, and that we do more to
make the benefits of professional advice understood and available to a wider group of people – now more than ever.

In doing this we can encourage people to make more informed decisions and open up options for their future finances. Ultimately, this will benefit everyone.

Now complete the questionnaire below to earn your CPD.

To recap, this article has helped you...

  • Explain the factors that affect the growing number of people with adverse credit on their credit file
  • Be able to describe how COVID has impacted the finances of customers with adverse credit
  • Be able to tackle customer misconceptions about securing a mortgage when they have adverse credit
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