“Lower interest if your credit score improves” – a good idea?

Many people are frustrated by only being to access expensive credit. Their financial problems may be years in the past, but they still cannot borrow at a reasonable rate.

The FCA’s Woolard Review said in January 2021:

Products or business models which aim to help consumers bridge from sub-prime to near-prime or mainstream have an important role to play in expanding access to credit, and consumers value them as an option.  

What could these “bridging products” be, ones that help customers make the transition from a poor credit score to a better one?

The type of loan offered by LiveLend is one possibility. This is an unusual loan where the interest will drop when your credit score goes up.

That sounds attractive – but how much could it actually save you? Is this a genuine help or just a marketing gimmick?

Existing products aiming to improve credit scores

First a quick look at other products that promise they can improve your credit score.

“Credit builder cards”:

• these can sometimes work well if you can pay them off in full every month;
• but too often they lead to more expensive debt and a worse credit rating, see Will a credit card improve my score?  

LOQBOX – a monthly saving scheme that looks like a loan:

• this is great for people with very little on their credit file and for people trying to repair their credit score after insolvency.
• if you don’t have the spare money to save, it won’t work for you.

Experian Boost and similar products aim to increase your score by including extra payments on it:

• they only make a small difference to your score;
• lenders don’t use the score that consumers see, so it isn’t clear these really help people.

Bad credit consolidation loans:

• repaying any credit can help your score a bit but adding a few nice marks to your credit record won’t outweigh a lot of big problems.
• the high interest charged mean people often struggle badly and have to borrow more – that’s bad for your credit rating. See Can I get a debt consolidation loan with a bad credit score? for details.

LiveLend – how does it work?

LiveLend starts out like a standard loan, with an APR between 12.6% and 39.8% depending on your situation when you apply.

In April 2021 they are quoting a “representative APR” of 24.9%. That’s obviously not cheap, but there are a lot more expensive bad credit loans around.

During the loan, LiveLend will review your credit score every three months. They will reduce the loan’s interest by 2% for every 25 points their credit score for you has increased, providing you aren’t in arrears. Your loan rate can never go up at one of these reviews, only down.

Comments from customers

The people I talked to generally liked the LiveLend loan. I’m not saying my very small sample was representative. For a start they all had an interest rate of 20% or less, which is less than the average APR.

They had all come across LiveLend through credit reports such as ClearScore saying they were likely to get a LiveLend loan.

They liked the loan because they felt they were given a decent rate of interest at the start. Two examples:

“I haven’t got a bad word to say about them.”

“the loan was affordable due to not having to pay the extortionate APR’s I have had in the past with Likely Loans and 118118 money – 99% was the highest I’d paid… [Livelend] was very fair for my circumstances: 13.5% with a manageable loan term.”

They weren’t very focused on the possible interest rate reductions, seeing them as a nice little bonus if it happens.

None of them is complaining about the affordability of the LiveLend loan. And these people know about affordability complaints as they are all making affordability complaints about other loans.

Potential problems with this sort of loan

Using a score a customer cannot see

Many people will assume the Equifax credit score LiveLend is using is “their credit score”. But it isn’t the number a customer can see on an Equifax report.

LiveLend use what they call “a management score” from Equifax. This is not the score a customer can see on a credit report.

This means Livelend are using some black box number as your credit score. It emerges from a credit scoring algorithm that you aren’t told anything about, you can’t check and you can’t complain about if you think it is wrong.

I am not sure how many of their customers will realise this. The FAQs explain the management score is different from the Equifax score a customer can see, but this isn’t mentioned on their home page nor on their “How it works” page.

This wouldn’t matter so much if the Equifax “management score” was always very close to the one a customer can see. And if both scores go up and down at the same time.

But one customer told me that her ClearScore number had gone up but her LiveLend rate hadn’t been reduced. When she asked LiveLend, she was told her initial management score was 382 when the loan started and on the first review it had fallen to 339.

So one score went up and the other dropped. I don’t know when these differences are likely to occur, but I think customers should be warned about this before they take the loan.

Customers may be too optimistic about their credit score

This is already a problem with consolidating debt with any bad credit loan.

High-cost lenders often say something like “It could also help to improve your credit rating.” That is true in the sense that repaying any credit can help your credit score…

But many people think that repaying defaulted debt or a CCJ will improve their credit score. That is wrong – repaying a default does not change your credit score at all.

This danger seems potentially worse with a loan like LiveLend – even though LiveLend do not market it as improving your credit score. Borrowers may still think that using the loan to repay problem debt will make their credit score better, which will then cut their interest on the LiveLend loan.

One of the borrowers I spoke to had used the LiveLend loan to repay a defaulted payday loan. That was probably not a good decision, piling on more interest when no further interest could have been added to the payday loan.

Customers may not close other accounts

This is a general issue with consolidation loans, not the LiveLend loan in particular. When consolidation loans are used to clear credit cards, catalogues or overdrafts, it can look like a saving each month, but if the other accounts are not closed it is very easy for debts to be run up again. For high-cost consolidation loans this is a major problem.

Customers may expect payments to drop by more

Some people may assume an interest rate cut will significantly reduce their payments.

In practice, the early repayments in a loan are almost all interest. So reducing the rate during the loan will not cut the repayments to what they would have been if the loan had been at the lower rate from the start.

An example. One person had their LiveLend loan interest cut from 12.9% to 10.9%. Their loan payments dropped from £211.41 to £206.38.

Marketing loans on the basis of credit improvements is problematic

I have looked at LiveLend because it illustrates some difficulties that other products aimed at helping people move from subprime to near-prime are likely to face:

• the lack of transparency around how credit scores are calculated;
• poor understanding by customers of what affects their credit score; and
• over-optimism about consolidating debts.

These don’t seem to be posing a problem for LiveLend because it is mainly marketing its loans on the basis of the initial interest rate, which isn’t that high.

But other lenders may place more emphasis on the “reward of interest rate reductions” in advertising. This could result in people take out high-cost loans expecting that their payments will soon be reduced, which may not happen.

The Woolard report said that the FCA should look at how effective credit builder cards are in practice at improving people’s credit score. And it should stop the use of the term “credit builder” if it finds the cards are ineffective.

The FCA should try to avoid similar problems with new products in this area. Insisting on prominent messages about what credit score is used, that repaying a defaulted debt does not improve your credit score and that debt advice should be taken before a consolidation loan would be a good start.

Requiring lenders to publish quarterly data saying what percentage of borrowers have benefited from an increased credit score and a reduction in interest rates would give consumers a better picture.

Reforming the credit information market may be a better approach

The underlying difficulty is that credit scoring is in such a mess in the UK that trying to design products that will help people improve “their credit score” is almost impossible.

See Credit records & scores – not fit for purpose! which lists the many problems.

This isn’t a problem that can be solved by consumer education. The fundamental problem is that defaults several years ago, long paid off, continue to harm someone’s credit score for 6 years.

The FCA started an investigation into the credit information market in 2019, which was sidelined in 2020. Now in 2022 it has been restrated but doesn’t seem to be moving at all fast. This needs to be given a high priority.

If credit scoring is reformed, it will be simpler for people to escape from the bad credit trap once their finances have improved. And easier to design products that will help them achieve this.

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