A credit score is a crucial tool in the world of personal finance, used by institutions to gauge how well you manage your money and repay your debts.
It’s a critical factor when applying for any type of loan, from mobile phone contracts to mortgages and personal loans.
Consequently, those with less-than-stellar credit scores may find themselves shelling out thousands more in interest compared to their counterparts with good or excellent scores.
TotallyMoney revealed that individuals with a poor score could end up paying an extra £6,670 on a £5,000 loan than those with better scores.
Stellar credit scores not only unlock better interest rates but also allow borrowers to secure larger loans with more favourable terms, and may even open up access to products that those with poor scores can’t see.
Alarmingly, TotallyMoney found that only one in four people have checked their credit report in the past four years, with 32% discovering errors that had been negatively impacting their score and likely causing them to pay more for no valid reason.
Andrew Hagger, the money maestro at Moneycomms.co.uk, has crunched the numbers and issued a stark warning: “Having a (poor credit score) can lead to a spiralling debt situation that’s difficult to escape from unless you’re very disciplined and able to manage the higher monthly costs while your credit score gradually recovers. If you’ve had credit issues in the past, a lender will consider you higher risk and price their products accordingly — it may seem unfair but it’s the harsh reality when it comes to borrowing money.”
He flagged up some lesser-known factors that can bump up a credit rating, including how something as simple as registering to vote can boost your score by confirming personal details. A crucial point for people to ponder is that having no credit history at all can hammer your score – not having used a credit card or engaged in any form of payment plan could land you in this category.
Alastair Douglas, CEO of TotallyMoney, also chipped in with his top tips for polishing your credit report, crucial for those on the verge of applying for loans.
He shared: “The first steps you should take before applying for any borrowing is to check your credit report, make sure everything is up to date, and fix any errors. While some websites might charge you to do this, you should never pay, as the data is yours — so find an app which will let you do this for free.”
“You should also spend some time shopping around for the best deal. This means going to different banks and comparison sites, and checking your eligibility before finding the best offer for you. And remember, make sure you can afford the repayments, and try to never borrow more than you need.”
“Some lenders are now using open banking data instead to make their decisions. This means that if you give them access to your data, they can make a more accurate assessment of your ability to repay the debt. That way, it can be more personalised, and you might even be able to secure a better rate.”
