People who are credit excluded have limited or no access to mainstream credit. Importantly, they may be excluded because they, for whatever reason, cannot access credit services, or, because those services simply are not useful to them because of their particular circumstances—this is what some scholars call access and utility exclusion. Barriers may be physical or social, like geographic location, language skills, and lack of financial literacy. But exclusion likewise has much to do with how financial institutions design, price, and market their products and services.
Often, people who are credit excluded have, like 32% of Canadians, a “non-prime” credit score. They may also lack a credit report or score, or be otherwise perceived as high risk, putting them outside of the risk level most prime lenders, such as banks and credit unions, are willing to tolerate. They are left to contend with lacking liquidity, or, alternatively, accessing credit outside the mainstream banking system through poorly regulated payday, pawn, or non-prime instalment lenders—often at a much higher cost. Payday loans, arguably among the worst offenders, charge interest rates numbering in the hundreds of
Credit exclusion acts as a “multiplier” of existing inequalities, hindering social mobility. Consider a new immigrant who has to miss a job interview, because, due to the lack of Canadian credit history, she cannot get a personal loan to pay for transportation. Or a single parent who, after paying for an unexpected expense, defaults on their credit card debts, sees their credit score plummet, and, while working paycheque-to-paycheque (like 44% of Canadians), ends up using payday loans to pay for basic living expenses—like 41% of payday loan users—potentially accumulating mounting debt as they borrow repeatedly. Whether individuals make use of high-cost alternatives or not, being unable to get credit services produces poor social, economic, and health outcomes.
An excerpt from ‘Access to Credit in Canada’ by Daniela Zaks
We Support Open Banking
To combat credit exclusion we believe in consumers owning their financial data, not the bank. Learn more in our brief on: ‘OPEN BANKING: Benefiting The Underserved’