Why your financial records could be costing you thousands

Millions are paying more than they should be for loans

Most of us don’t give them a second thought from one week to the next. We crack on with the everyday, juggling our financial obligations with varying levels of success and just expect our credit scores to keep up somewhere in the background. 

But as we were recently reminded, the assumption that all is fair, or at least accurate, in life and money is a dangerous one to make. 

So what’s the real cost of a low credit score? Probably a lot more than you think. This isn’t just about the embarrassment of being refused a store card you were hoodwinked into applying for at the checkout. 

New research confirms that the consequences of a low credit score and a bad credit rating could mean huge losses to customers who are unaware of the impact their credit score has on a lender’s decision. 

Borrowers with a lower credit score are charged higher interest rates because they’re seen as a greater risk by a bank or lender.

True cost

A bad credit score could mean the interest on a £3,000 credit card bill over two years could cost you almost £2,000 more than it would if your rating was high. A personal loan of £7,500 over four years could cost an extra £7,453.

And a £207,000 mortgage could cost an extra £14,857 over the first five years, or £78,500 extra over a 25-year term for a 90 per cent loan-to-value (LTV) loan.

These are crippling figures compared with the original loans, particularly for those whose financial circumstances aren’t in a great state to start with.

Alastair Douglas, CEO of TotallyMoney, which conducted the study with financial researcher Moneycomms, says: “The extra fees people pay for having a bad credit score are huge. 

“Lenders review a customer’s credit report when they apply for a product. With a bad score, they’re more likely to charge a higher APR, offer less interest-free months, or even reject an application.

“Being informed about their score can help people to see where to improve and how to get the best deals. A report shows customers up to six years of credit history, and how much credit they are currently using.

How to improve your credit score

A top-notch credit score is all about demonstrating to a potential lender that you are a responsible, stable and financially capable individual who will give them their money back as agreed. 

A poor score could be down to failure to pay bills on time and having high levels of existing borrowing compared with your income and expenditure. Even things that are out of your control can hinder your profile, such as errors on your file, fraudulent activity or simply being financially linked, through, for example, a joint account, to someone who struggles to manage their own money.

Where do you stand?

First things first, check what your current credit score looks like. Long gone are the days when you had to pay through the nose for access to your own information so search out the free services to check the details. 

This will allow you to see the records held about you and check for any questionable activity, genuine mistakes or to start the process of separating your financial affairs from those who are hindering your score. 

It’s worth doing this thoroughly as even a slightly incorrect address can have an impact. Report any incorrect details to the credit reference agency immediately. 

Once you know the lie of the land you can start to take action in “real” life that will not only improve your rating but could also help you sleep at night.

Things can only get better

Make sure you pay your bills on time, including mobile and landline costs as well as big payments like a mortgage, the Money Advice Service warns. And try to pay off existing debt before taking on new borrowing. 

“This is because banks, building societies and credit card companies might be hesitant about lending you more if you already have a lot of existing debt,” the independent information service adds. 

“Your credit utilisation is how much of your available credit limit you use. For example, if you have a credit limit of £2,000 and you’ve used £1,000 of that, your credit utilisation is 50 per cent, so you’re using half of your credit limit. 

“Usually, using less of your available credit will be seen positively by lenders, and will increase your credit score as a result. If possible, try and keep your credit utilisation at 25 per cent or lower.”

Meanwhile, register on the electoral roll and remember that a lender is much happier lending to those who don’t move around too much.

County court judgments against you can have a massive effect on your credit score too. If you’re worried about unsustainable problem debt contact one of the free debt charities for help sooner rather than later, such as StepChange  or NationalDebtline 

These organisations provide completely free advice and support and shouldn’t be confused with commercial debt management firms with similar names that will charge you for their input.

Kate Hughes Money Editor @hughesthehack, Saturday 14 September 2019 23:00