Credit ratings: Borrow yer money and take yer chance

I don't know what I expected to find at The Money Shop, but I suppose I did have one unexamined assumption: that the people using it would have something obvious in common. Payday loans are not easy options: even if it was just a glint of worry in the eye, I thought, there would be a hint that they were all in the same boat. It's a bit shaming that I intuited this. And it is, of course, not the case.

At the north London branch of the chain where I loitered on Friday, customers come in all varieties. There's a young mum and a guy in a tracksuit and an impeccably turned out white-collar gent carrying a bunch of flowers. They are understandably reluctant to speak about their reasons for being there, but eventually a woman in her mid-thirties whom I'll call Lucy stops to talk. Considering the recent national hand-wringing over the dangers of payday loans, she is remarkably sanguine about the £200 she is borrowing for a couple of weeks to buy her boyfriend and her nieces their Christmas presents – for which she will pay a premium of more than £50.

She is not unusual. According to the Money Advice Service, more than a million people will take a payday loan to help cover the costs of the season. "I never have money problems," Lucy explains. "But I had to get the plumber in twice this month and it's left me a bit short. So this is good for a quick fix."

Lucy isn't worried, and perhaps she needn't be. On the other hand, the getting of the loan is, in general, the easy bit. More domestic difficulties and she might feel a little differently. Indeed, the Money Advice Service also says that one in 10 people are still paying back Christmas debt from last year. And, as the Government finally promises to act on the issue of the payday market and put a cap on the overall cost of the borrowing, it is worth remembering that the consequences of a short-term loan are not limited to your repayments, and do not exist in isolation.

That brand name, "The Money Shop", is a little unnerving. It reminds us of the essential weirdness of a loan: a means of buying money with money. Everyone understands this, and when we weigh the most obvious part of the transaction – the assessment of your trustworthiness by the analysis of your financial affairs – we tend to agree that it makes sense. The part that should give us pause is the part that we don't think about so much: a loan is not merely a gauge of your creditworthiness. It can also significantly shape it for the future.

Last week, the BBC's Newsnight programme claimed that two-thirds of mortgage brokers say they have had clients turned down after they took out a payday loan. Because it's easier to take out a few in quick succession than it would be if you were borrowing in a more conventional way, it is also easier to do significant damage to your future prospects of getting a loan.

It's such a weird business, credit, when you unpack it. And it's one that many of us don't think about nearly enough. "So many people aren't aware of it," says James Jones, head of consumer affairs at the credit reference agency Experian. "People might see a story about credit, like this, in the paper and think, oh, I'm fine, and move on to the next article. But, actually, it is more and more important for more and more people."

Jones runs an agony-uncle service answering people's questions about credit on the Experian website: a quick skim of the questions suggests that many of us are baffled about the opaque workings of the credit system. "Getting on the electoral roll can help your credit," Jones says, by way of example. "And, if you have joint credit with a partner and then break up and don't sever those links, we don't know about it, so your credit could be affected in the future."

This is the strange contradiction of the credit system: your most intimate information is being used to create a version of you that can ultimately only be an imperfect model, and one that is always a little out of date. The credit agencies know spooky amounts about you but also nothing at all. It feels like information that should belong to you; that the data which decides your financial fate is in the hands of other people, often out of your immediate reach, seems a bit like going to the doctor and learning that you are going to die, but then being informed that the diagnosis is proprietary. Credit is a more important fact of life for more people than it has been for a long time. And yet our understanding of it has barely begun to catch up.

Consider, for example, the cautionary example of Ellen (not her real name), a 25-year-old brand manager who needed to get a car for her work. Well paid for people her age and confident that she had always paid off her debts on schedule, she applied for a car loan with every expectation of getting it – and was appalled to be told that her credit rating wasn't good enough. Eventually, she discovered the cause: the forgotten store cards she had used as an 18-year-old student. The sums involved were small but they also created a record of unreliability. "I remember speaking to the credit agency over the phone and just crying, and just the regret – I had no idea that it would affect me so badly," she said. "When I was a teenager I didn't know the first thing about credit. I was so naive."

To fix the problem, she took advice about the best way to improve her credit score: get a new credit card and use it to make a single purchase of £60 or so, and then, rather than pay it all off at once, make the minimum payment and gradually wipe the debt out over many months. That way, even though she would be in debt for longer, she would also demonstrate her reliability. There's a certain logic to this, but it still seems completely mad. "It's the ultimate game of hard to get," agrees Ellen. "You have to show them you'll pay it back, but not right away. Dating is so much easier." She got there in the end, but Ellen now subscribes to monthly updates on her credit score. And she doesn't have any store cards.

Ellen is not alone in her caution. Young people, a recent study found, are significantly less likely to have credit cards than their older peers. And if that means more of us are learning to live within our means, it may be no bad thing. When it comes to credit, being on your guard seems to be the only sensible posture to take. Mysterious as the system is, it is otherwise very hard to be sure of where you stand. Perhaps that is why everyone in The Money Shop seems so cheerful: the ignorance. You might be quite right to feel confident about paying the money back. But the system is never going to believe you.