The consumer credit industry needs to do more to recognise customers’ efforts to rehabilitate their finances, according to a new report.
Debt defaulters who start a repayment plan see only a marginal improvement to their credit score at first compared to non-payers – a factor the report says needs to change.
The document, Debt Britain 2016: The Big Picture, has been compiled and published by debt purchaser Arrow Global.
Arrow analysed a sample of 20,000 customer accounts to assess how much consumers’ credit score improved when they rehabilitate their debt by starting repayment plans or settling a debt.
Analysts found that debt defaulters benefit from a marked improvement to their credit score once they have fully repaid or partially settled a problem debt.
The average credit score for defaulters who repaid a debt improved by 3.8 percent; for those with lower credit scores the impact of settling a debt was an 11 percent improvement to their credit score.
But the average credit score of a debt payer increased by just 1.8 percent once they set up a repayment plan – only slightly more than a non-payer (1.4 percent). This is the key point the report highlights. Arrow said this shows there is insufficient recognition for consumers who take this highly positive first step.
In a bid to improve the recognition of repaying customers, Arrow has suggested the implementation of an industry-wide traffic light system. This would sit alongside a consumer’s credit score and would change according to their repayment activity.
The meaning of any traffic light signals could be, for example:
• Green for those who had not defaulted in the past six years;
• Amber for those who had defaulted but had subsequently made good or stuck to a repayment plan for at least six months;
• Red for those who had defaulted and failed to maintain a plan for six months to make good the shortfall.
Arrow Global plans to arrange an industry round-table based on tinsights in the report, to work towards industry consensus on changes that could be made to better recognise debtor rehabilitation.
Tom Drury, group chief executive of Arrow Global, said: “We believe that the consumer debt industry could be better at recognising and encouraging debtor rehabilitation. Getting a problem debt under control is a significant achievement with major long-term benefits for the individual.
“All participants in the consumer debt sector should be encouraging consumers and ensuring their progress is recognised in a clear and transparent way that is visible and comprehensible to all consumers.
“This is why we want to build on the insights from our Debt Britain report to help improve outcomes for consumers. We have some ideas on changes which can be made, including a new debt traffic light system, but it is important that all industry participants work together.
“Discussions between stakeholders including credit reference agencies, lenders, collectors and debt charities, will be a first step towards improved recognition of consumer debt rehabilitation.”