Borrowers with bad credit reports lose thousands of pounds when they apply for loans and cards because they end up getting worse rates and terms than those with better records, research shows.
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Borrowers with a lower credit score generally pay higher interest rates and receive less generous terms from lenders because they are considered a greater risk.
However, consumers may not realize how much of an impact this can have on their finances, so the report exposes some very significant blows that a bad credit score can cause.
Check: Many people don’t realize how bad credit affects the rest of their finances
Some of the costs that people may face if they have a bad credit score include:
Paying a £3,000 credit card bill over two years can cost £1,979 more in interest
· A personal loan of € 7,500 over four years can cost € 7,453 extra
A £207,000 90 percent loan-to-value (LTV) loan can cost an additional £14,857 over the first five years, or an additional £78,500 over a 25-year term
Totally Money found the numbers for the credit card scenario by comparing 0 percent purchase credit cards for someone with excellent credit to a Vanquis credit card that charges 69.9 percent APR on a subprime credit card for borrowers with poor credit.
For the personal loan scenario, it compared someone with an A1 credit rating who borrowed at 2.9 percent APR to a best personal loan of £7,500 from Admiral, John Lewis Personal Finance or M&S Bank, which paid the total interest of £446.40 over 48 years. rose for months.
It then compared this to a Guaranteed Loan from Amigo that charged 49.9 percent APR, which accrued aggregate interest of £7899.36 over 48 months.
For the mortgage scenario, it was based on a 90 per cent mortgage of £207,000 with a property value of £230,000 – equivalent to HM Land Registry’s average UK property value in May 2019.
The survey compared a best-buy HSBC mortgage at 2.29 percent fixed for five years with £999 fee at £906.90 per month, against Aldermore non-prime mortgage at 4.68 percent fixed for five years at no cost at £ 1172 per month.
In five years’ time, the HSBC total will come down to £55,413, while at Aldermore it’s £70,320 plus an additional cost of £14,907 if you have bad credit.
Over 25 years, the HSBC total will be £273,069, while the Aldermore equivalent is £351,600 plus an additional cost of £78,531 if you have bad credit.
Better: Reviewing a credit report is the first step customers can take to improve their score
Reviewing a credit report is the first step customers can take to improve their score. Once people know where they stand, they can take the necessary steps to increase their credit score and build a better credit profile.
When customers have an improved credit rating and score, they can get better deals on all types of credit. This, in turn, means more interest-free offerings, lower APRs, and more choice.
Customers can then get a cell phone plan or perhaps spread the cost of large items over several months, including purchases such as furniture or a new car.
Alastair Douglas, CEO of credit experts TotallyMoney, said: “The extra costs people pay for a bad credit score are enormous. By taking the time to check their report, they can understand why this might be happening.
“Lenders review a customer’s credit report when they request a product. With a bad score, they are more likely to charge a higher APR, offer fewer interest-free months, or even decline an application.
“Knowing their score can help people see where they can 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.
“At TotallyMoney, we are on a mission to improve the UK’s credit score. Checking a report is the first step in this process and can help people understand their score. This will give them better rates and more choice, enabling them to work on a better financial future.’
Common Misconceptions About Credit Reports and Scores
This is Money, along with information from TotallyMoney’s 2019 annual financial awareness survey, has revealed some of the common misconceptions people have about their report and score.
The survey was based on a nationally representative sample of 2,000 British adults, commissioned by TotallyMoney and conducted by OnePoll.
1) Checking your credit report affects your score
About 23 percent think checking their credit report will hurt their credit score. This is not true. A free credit report from TotallyMoney will not affect your score or rating, so customers can check it regularly without damage.
2) You have a universal credit score
The majority of people (69 percent) believe they have a universal credit score. In fact, all customers have more than one credit score. The score varies depending on the credit reporting agency providing the report.
There are three credit reporting agencies: TransUnion, Experian, and Equifax. Each has a different scoring system.
3) Savings improve a creditworthiness and score
Another 22 percent believe that having savings improves their credit score. Saving is not a form of credit. So they will not appear in a credit report and will not affect your score.
4) Earnings Affect a Credit Score
More than half (59 percent) think their earnings impacted their credit score. How much you earn does not affect a score. It’s about how well you manage your credit.
5) Getting paid monthly has a positive impact
Another 27 percent think that monthly payout positively impacts their score. When you get paid and how much you earn does not affect your credit.
Meanwhile, 26 percent admitted their knowledge of credit reports was poor, showing that more needs to be done to help inform people.
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