The UK Credit Score Guide 2018
Most Britons now recognise the importance of a good credit rating when it comes to accessing financial products. However, the way it affects us is much more complicated than simply being refused credit. In this article, we turn our attention to how a poor credit score has an impact with information about:
- Access to credit facilities
- A poor credit score doesn’t always mean a refusal
- Priority bills and your credit rating
- Mobile phone contracts for those with a low credit score
- The impact of your credit score on car and home insurance premiums
- Landlords and credit checks
- Vetting prospective employees
In research carried out by Aqua (in a report entitled ‘The Cost of a Poor Credit Rating’), they found that a low credit score had an impact on every part of people’s lives. Would you believe that an average British middle-class family with a poor credit score could end up paying up to £1,225 more a year than one with a good score for the same financial products?
In this article, we look at how a poor credit rating can end up costing you money. We also look at other interested parties who might consult your credit file and how a poor score could cost you the home you wish to rent or even your dream job.
Access to credit facilities
In the wake of the financial crisis of 2007-8, banks and building societies became much more careful about who they lent money to. Instead of just concentrating on a borrower’s salary as they used to, they now give much more emphasis to the affordability of the loan or credit agreement. Consulting your credit file gives them an overview of your money management skills, existing financial commitments and spending habits.
Whether you wish to apply for a mortgage or take out a personal loan, a poor credit rating can be one of the reasons for being turned down. In the case of a major financial commitment like a mortgage, it’s therefore recommended that you make an effort to improve your credit score at least a year before you start shopping around for mortgage providers.
A poor credit score doesn’t always mean a refusal
For credit agreements like loans and credit cards, you may not be rejected outright. However, this isn’t a cause for celebration since you will be penalised for having a lower credit rating. In these cases, the financial institution will charge you a higher APR to cover the risk you represent to them as a borrower. They’re well within their rights to do this. The law states that the advertised APR only has to be given to 51% of their customers.
As well as the cost of borrowing, a lower credit score will restrict the amount that you’re allowed to borrow or your credit limit.
With a poor credit rating you’ll definitely be in the other 49% and pay much more to borrow money. Alternatively, you might not be eligible for money-saving promotional offers. Either way, you’ll pay much more than someone with a higher credit rating. As well as the cost of borrowing, a lower credit score will restrict the amount that you’re allowed to borrow or your credit limit.
Priority bills and your credit rating
Experian has revealed that 1 in 8 of its credit entries are from an energy, water, broadband or home phone provider. Utility and phone providers are making increasing use of credit reference agencies. Most of the big names in the energy sector regularly share data about their customers. Some only do so in the case of a late payment or default. Either way, the payment of your priority bills can have an impact on your credit rating. This too can cost you money but how?
If a credit check shows that you struggle to pay your priority bills, energy providers are more likely to request that you use a prepayment meter in your home. Although these meters allow you to pay for your energy consumption gradually, the price you pay is significantly more expensive than a fixed price tariff.
Mobile phone contracts for those with a poor credit score
Although many consumers don’t think of a mobile phone contract as a credit agreement, the price of the handset is included in the monthly bill. This means that you’re effectively borrowing money from the phone provider to purchase the phone.
You’re less likely to be granted a contract if you have a low credit rating. Being forced to use a pay-as-you-go phone means you pay more for your communication needs and miss out on many of their promotional offers too.
The impact of your credit score on car and home insurance premiums
Like mobile phone contracts, many consumers don’t consider home or motor insurance to be a credit agreement. If you pay your insurance annually as a lump sum, then of course it isn’t. However, if you pay your insurance premiums monthly, then you’re essentially borrowing money to pay for the coverage. Insurers cover the cost to them by charging you interest on the premiums and also carry out a credit check beforehand. A poor credit rating can cost you more money in the monthly premiums you pay.
Landlords and credit checks
Private landlords are increasingly wary about who they rent their property to. Eviction of tenants can be both time-consuming and expensive. Therefore, landlords use a ‘soft’ search of your credit report to make sure of your identity and that you pay your bills on time. Such checks only access data from public registers such as the electoral roll and records of CCJs and bankruptcies rather than all your credit agreements.
If you have a history of poor financial planning, it’s quite possible for a landlord to refuse to rent the house to you, ask for a larger deposit or ask a third party to act as a guarantor. Generally, a poor credit score can make it more difficult to rent property.
Vetting prospective employees
It’s also becoming increasingly common for employers to carry out a credit check as part of their background screening of would-be employees. You might expect this in sectors where employees are dealing with sensitive data such as the financial industry. However, many other industries are now asking applicants’ permission to consult credit reference agencies for a ‘soft’ search. You can of course refuse to give your consent but this might cost you the job. Why are employees carrying out a check?
One reason is that responsible financial management of your personal affairs can be an indicator of your character as an employee. The other reason is that if you’re under significant financial strain, it’s felt that this could have an impact on your work performance.
Concluding words about your credit score
You might be one of the people who doesn’t believe that you should use credit. Perhaps you prefer to save for purchases rather than borrow. However, a low credit score has an impact on many more areas of your life than you could possibly imagine. From your energy and phone bills to job applications, a healthy credit rating can save you money and allow you to achieve both your personal and professional goals.