Zopa, the FeelGood Money company, has today launched Borrowing Power, an innovative new tool designed to help customers get access to cheaper credit.
It represents the first time a lender has been transparent about what factors it looks at when deciding who to lend to.
Uniquely, it is also the first time a credit tool has been directly linked to a lending product and can offer customers better rates as they improve their borrowing power.
Zopa calculated that a customer taking out a new loan with Zopa could save an average of £600 over the loan period by increasing their borrowing power score by one point. The savings can be much larger however, as somebody borrowing £7,500 over three years could save £1,228 by moving their borrowing power from four to five.
Lending decisions and credit worthiness have been shrouded in mystery for far too long, believes Zopa. New research by the lender reveals that 29 per cent of Brits don’t understand how to improve their credit score in order to access cheaper credit and a further 45 per cent are unsure how lenders calculate the rate of borrowing. The poll of 2,000 UK consumers also highlighted that the majority of UK adults (61 per cent) don’t understand credit scores completely, and half don’t even know what their own score is (48 per cent).
Helping to demystify the factors that can affect consumers financial health, the free-to-use tool gives each user a bespoke borrowing power score between one and ten. Customers are then shown what makes up their borrowing power and, crucially, specific actions that can help them to improve it. The score is directly linked to the particular Zopa loan it unlocks, so that customers can immediately see if they are eligible for a loan and at what rate. Borrowing Power will be available for Zopa’s other credit products - such as credit cards - once launched.
Behind the simplicity lies a complex process made up of five components, including a combination of credit score data, credit utilisation, credit limits, hard searches and affordability based on personal circumstances.
Customers can also see the impact on credit availability with Zopa and the potential price if they improve their score by a set amount - linking improvement to a tangible outcome.
Ultimately, improvements in a borrowing power score can significantly lower the cost of borrowing for customers - a function the company believes is much needed amidst current consumer confusion. When it comes to improving their score, 38 per cent of adults wrongly believe the amount they have in savings can affect their rating. Other common factors Brits think could impact their score include an increase in their salary (59 per cent) and being married (31 per cent).
Didier Baclin, Zopa’s Chief Product Officer, commented: “Giving people certainty, transparency, and ultimately the power to lower the cost of credit in the future is unique in the market. With Borrowing Power, we are putting the power back into the hands of the customer - allowing people who may not be eligible for credit , or those who want a lower rate, to take action and unlock a lower rate in the future. Zopa wants to take away the smoke and mirrors linked to creditworthiness. This new tool takes us one step further towards helping people feel good about their money.”
To address other consumer concerns, in all cases, Zopa shows real rates so that customers know exactly what their rate of interest will be should they decide to take up the loan, rather than the advertised rates offered by other loan providers. Zopa also only performs soft searches on customer’s credit history so Borrowing Power can be used over time with no impact on consumers’ credit score.
The top things people can generally do to improve their credit position include:
Do: Keep credit utilisation low, preferably under 30per cent of your limit
Do: Register to vote
Do: Ensure your name is on a utility bill
Don’t: Make numerous hard searches in a short space of time
Don’t: Go over your available credit limit