Five credit ratings myths busted: We reveal the true cost of a poor credit score

Borrower with poor credit reports are losing out on thousands of pounds when they apply for loans and cards because they end up with worse rates and terms than those with better records, research shows.

The true cost of a bad credit score manifests itself in the better offers that the applicants with black marks on their file are missing out on, according to TotallyMoney and Moneycomms.

Borrowers with a lower credit score are generally charged higher interest rates and given less generous terms by lenders as they are seen as a greater risk.

However, consumers might not realise how much of an impact this can have on their finances, so the report lays bare some very significant hits a poor credit score can inflict.

Some of the fees people could potentially face if they have a bad credit score include:

· Paying a £3,000 credit card bill over two years could cost £1,979 more in interest

· A personal loan of £7,500 over four years could cost an extra £7,453

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

Totally Money found the figures for the credit card scenario by comparing 0 per cent purchase credit cards for someone with an excellent credit rating against a Vanquis Credit Card charging 69.9 per cent APR on a sub-prime credit card for borrowers with a poor credit rating.

For the personal loan scenario, it compared someone with an A1 credit rating borrowing at 2.9 per cent APR with a best buy personal loan of £7,500 from Admiral, John Lewis Personal Finance or M&S Bank which incurred the total interest of £446.40 over 48 months. 

It then compared this with a Guarantor Loan from Amigo charging 49.9 per cent APR which accrued total 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 £230,000 – matching the HM Land registry average UK property value May 2019.

The research compared a best buy HSBC mortgage at 2.29 per cent fixed for five years with £999 fee at £906.90 per month against Aldermore non-prime mortgage at 4.68 per cent fixed for five years with no fee at £1172 per month.

Over five years, the HSBC total equates to £55,413 whilst at Aldermore equates to £70,320 plus an extra cost of £14,907 if you have a bad credit rating.

Over 25 years, the HSBC total is £273,069 whilst the Aldermore equivalent is £351,600 plus an extra cost of £78,531 if you have a bad credit rating. 

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 then 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 are able to get better deals on all types of credit. This in turn means more interest-free offers, lower APRs and greater choice.

Customers can then get a mobile phone contract or perhaps spread the cost of big items over a number of months, including purchases such as furniture or a new car.

Alastair Douglas, CEO of credit experts TotallyMoney, said: ‘The extra fees people pay for having a bad credit score are huge. Taking the time to check their report means they can understand why this might be happening.

‘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.

‘At TotallyMoney, we’re on a mission to improve the UK’s credit score. Checking a report is the first step of this process and can help people to understand their score. With this, they can get better rates and more choice — helping them work towards a better financial future.’