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HALF of 16-24s don’t know that a missed payment can damage their credit score

Young borrowers are unknowingly putting their financial futures at risk, with many unaware about the damaging implications of missing loan or credit card repayments.

More than half (54 per cent) of 16–24-year-olds were unaware that a missed credit payment can impact their score and negatively impact their chances of securing credit in the future, according to research by Compare The Market.

Almost half did not know that their credit score would be checked when applying for a credit card, and 45 per cent were unaware their credit history was also checked when securing mortgages or personal loans.

Some 54 per cent of 16-24 year olds are unaware that missed loan or mortgage payments can impact their credit score, according to Compare The Market

In the wider population, more than two thirds of people knew that credit scores were used to check eligibility for credit cards, and only 71 per cent were aware they were used for mortgages or personal loans.

The research described a lack of awareness among many young people about what specific actions impact credit scores, and found that many were unsure how to improve their rating.

‘Credit scores are used by lenders to understand whether a borrower can afford a product and assess their ability to pay it back on time,’ said James Padmore, head of money at Compare The Market.

‘Certain actions can impact your credit score, either positively or negatively and our research shows that while young adults believe they have a handle on credit, there is a significant knowledge gap.

‘Having a low credit score early on in life could unfortunately affect your ability to get a mortgage or a personal loan, for instance.’

More than half of young people did not realise a poor credit score could lead them to being ineligible for the most competitive deals, whether that be a mortgage, personal loan or credit card.

Nearly three-quarters did not realise that registering on the electoral roll could have an impact on their credit rating, while over two-thirds were unaware the length of their credit history could influence their score.

County Court Judgements, Individual Voluntary Agreements and bankruptcy,  all of which stay on a credit report for six years, were only known to have a negative impact by 43 per cent of young people. 

Be wary of Buy Now Pay Later schemes

Buy Now Pay Later schemes such as Klarna have become a popular form of credit, with five million people using these products during the pandemic, according to the FCA.

These schemes enable shoppers to delay or spread the cost of a purchase over a period of time rather than paying the entire cost in one single lump sum payment at the point of purchase.

Over half of Buy Now Pay Later users aged between 16 and 24 have missed at least one payment on these types of purchases in the last year.

Although most schemes run a soft credit search when a customer makes a payment – which won’t show up on an individual’s credit report – some products require a hard credit search.

This means if shoppers miss a payment or fail to pay back their debts in time, it could be marked on their credit report and impact their ability to apply for credit in the future.

How can people check their score?

A credit report not only details an overall credit score but also lists a person’s credit accounts, such as bank accounts, credit cards, utilities and mortgages.

It will also display their repayment history, including late or missing payments.

Young people will need to see their report first before they can better understand where they can improve. 

There are a number of ways to view your rating and history for free.

Experian and Equifax offer 30-day free trials of their service online, but you will need to remember to cancel before the end of the promotion to avoid subscription fees.

Ten tips to boost your rating

1) Register on the electoral roll at your current address

2) Use a credit card responsibly and always try to retain a good amount of available credit

3) Check your credit report regularly and ask for any errors to be corrected

4) Never withdraw cash from your credit card

5) Limit applications for new credit

6) If you have bad credit, stop applying for more credit  

7) If you don’t have a credit card, then get one – but just make sure you pay it off each month

8) Don’t miss repayments

9) Let your credit history mature

10) Don’t keep unused cards 

Experian will begin charging £14.99 once the 30-day free trial is over whilst Equifax reverts to £7.95 per month.

Checkmyfile also offers a free trial to check your reports with both Equifax and TransUnion UK – although after 30 days it begins charging £14.99 a month.

Alternatively, you are entitled to one free copy of your credit report every 12 months from each of the three main credit reporting agencies.

Free credit report options can also be found by visiting Credit Karma and Clearscore.

Why is it important to improve your score?

Your credit score reflects how reliable you are with credit, and it affects your ability to borrow money.

Having a good credit score will improve your chances of securing a mortgage, credit card or loan in the future and will give you access to better deals.

‘I would always recommend you keep tabs on your credit score especially if you are thinking about taking out a mortgage,’ said Andrew Montlake, managing director at Coreco Mortgage Brokers.

‘Lenders have more difficult credit scoring systems to pass if you only have a 5 per cent or 10 per cent deposit for example.

‘It is important to make sure there are no errors on your report and act to improve your score where you can before you come to apply for a mortgage.’

How can you improve your score?

There are number of ways people can improve their score, including by registering on the electoral roll at their current address, using a credit card responsibly and ensuring they don’t miss any repayments.

‘Just a few small changes can make all the difference to ensure you’re accepted for credit later on, such as registering on the electoral roll, not opening too many accounts at once and keeping your credit card balances 25 per cent under the limits,’ said Padmore. 

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