How my immigrant experience (and AI) made me want to abolish credit scores…

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10th June, 2024 Dr. Michelle He, Chief Operating Officer and Co-Founder, Abound and Render No Comments

From Dr. Michelle He, Chief Operating Officer and Co-Founder, Abound and Render

Excitement quickly turned to frustration when I moved to the UK nearly 14 years ago. I came here with a PhD, a good job and a decent salary but, when it came to personal finance, it was almost as if I didn’t exist. 

This was because I didn’t have a credit score – the number that almost single-handedly determines whether you can get a loan. 

Ironically, I moved here to help financial services companies improve their decision-making processes for lending! But after years of telling my clients there had to be a better way, I realised that if I wanted to change how these companies decided who to lend to, it would be better to do it myself. 

To understand the nature of the problem I was trying to solve, it’s worth understanding the nature of credit scoring. And when you do, it soon becomes clear that the current system isn’t just unfair, but it also actually doesn’t make any sense. 

Credit scores were invented in the 1950s. At the time, there wasn’t that much data about people’s financial situations. But today – not least through online and Open Banking – it’s so much easier for people to keep track of their incomings and outgoings in real time. It can usually be done through a few clicks of an app on a smartphone. 

But credit scores still do not take advantage of this. 

And when you add all the data now available to the almost limitless potential of AI – a subject I studied for my PhD – things get even more exciting.

So I thought, why not use these sorts of technologies and insights when processing loan applications?

That’s ultimately what the lending fintechs that I co-founded – Abound and Render – now do. We can offer people better rates while at the same time decreasing our own risk by making lending decisions based on a much richer picture. And it’s working, our customers default on their loans 75% less than the market would have predicted if we had only looked at credit scores.

Why does this matter? Well firstly because as my own story shows, there’s no shortage of creditworthy immigrants, recent graduates or simply people who’ve never taken out credit before that can and will repay their loans. 

But such a revolution in lending also matters for the economy as a whole. That’s because fewer people borrow more than they can afford and go into arrears. 

So it’s better for lenders because they take on less risk. And it’s better for borrowers because they are less likely to experience the misery of being stuck in a debt cycle and can, in many instances, borrow more and for cheaper because losses and risk are reduced.

What’s more, there is clearly a market for such a change. We estimate we can help 30% to 40% of the close to 10 million UK consumers who don’t have a credit score and are therefore “credit invisible”.

But as well as the business case, there’s a moral case. Through more data-driven, intelligent, and responsible lending, people can be supported to avoid payday lenders and their high-interest rates and unrealistic repayment terms. 

Smarter lending can also help those with existing debts consolidate them and focus on their future. We offer repayment holidays and the option to adjust repayment amounts, at any time, based on a real-time view of monthly affordability, as standard. We do this because we want to help people break out of debt cycles. 

So I’m proud to be enabling more responsible lending (especially during a cost-of-living crisis). I’m proud to have already helped migrants like me access credit. And I hope I’ve made another crack in the glass ceiling for many women, through the businesses I’ve co-founded and helped to build.

What I hope for now is that old fashioned credit scores, and the incomplete picture they give, can become a thing of the past for the benefit of everyone’s long-term financial health. 

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