The cost of a poor credit rating

By Marianne Curphey

A bad credit score can prevent you from getting future loans or credit cards, or from getting certain jobs. It could even increase how much you pay for certain services, such as broadband or utilities. So it's important to take care of your credit score and stay in lenders' good graces. If you've been careless with credit and have a less-than-perfect score, though, don't fret - you can take steps to improve it. bad-credit-effects

"[A poor credit rating] is a sign that you need to take responsibility and start to manage your money really well," says Nick Hill, proposition and product development manager at the Money Advice Service, a government website that offers money management advice. "[It] can be an opportunity to start taking control of your money matters and your financial life and make changes for the better."

Why a good score is important
Does it matter if you have a poor credit rating?

"If you are not planning to get a mortgage, a mobile phone, broadband, a car, then you could argue that it is not important," Hill says. "Lenders are trying to manage their risk, so if they have a consumer applying for a financial product who has a poor credit rating then they are likely to charge that consumer more, or not provide them with the product."

In fact, a report from Cranfield Business School suggests that people with poor credit ratings might have to pay an extra £1,000 a year for utility bills, mobile phone contracts, finance charges, car loans and broadband.

And you might be paying more and earning less if an employer decides against hiring you based on your credit rating.

"Employers may be looking at your credit report to see if you have any county court judgements against you, for example," says Andrew Webb, sales and marketing director at the credit rating agency Equifax

A poor credit rating can also:

  • Prevent you from being accepted for direct debits (which are often cheaper than pay-as-you-go or quarterly payments) to pay household bills;
  • Affect your ability to get new credit;
  • Increase the APR on any credit cards or loans you do get.

"Your credit rating is a bit like if you were going to lend money to a friend," Hill says. "You would want to know where they lived in case you needed to talk to them about it, and you would want to know that they were not going to go round to all their other friends and borrow lots of money [from them] as well. That's what lenders are trying to establish when they look at your credit rating."

Negative impacts on your score
Unfortunately, there are lots of things that affect your credit, says Webb. "For example, if you are not paying your bills on time, or even if you are paying your card off but you are using high amounts of your credit allowance -- if you are using 75% of your credit available, some lenders might see that as a risk."

He says having a lot of dormant accounts is sometimes seen as a risk because that is credit that you could potentially access in the future.

Other mistakes identified by the Cranfield report include:

  • Failing to pay your bills on time -- even if it's just a couple of days late;
  • Using more than 75% of your available credit limit;
  • Applying for more than four forms of credit in a year or applying for more than one credit product at a time;
  • Having many old credit card accounts open that you don't use.

Another potential problem might be that you don't have much experience with credit, says Webb. First of all, lenders don't know how you'll handle your limits and payments if you've never used credit before, so you may not get approved for the best deals. But, more importantly, if you've never used credit, you won't have a credit score, or your score may be very low.

Steps to improvement
There are simple steps that you can take to make yourself more attractive to a lender, Hill says. These include making sure you are on the electoral register and not applying for multiple lines of credit all at once. You should also pay your bills on time and check your credit report often for mistakes (and correct any that you find).

"Cards like Vanquis or Aqua or some of the Capital One cards are useful to help you rebuild your credit record gradually and demonstrate that you can handle credit responsibly," says Jasmine Birtles, founder of Money Magpie. These cards are available to people with low credit scores; however, they generally come with high interest rates, so you should be careful to pay off your balance in full each month (a habit you should get into anyway) to avoid paying extra fees.

If you feel you're getting into difficulties, talk with your credit card company. "They are not there to judge you or your debt, but will help you decide on your options," Allan says.

See related: Avoid late payments -- factor in processing time, Don't let nontraditional loans lure you to debt

Published: 19 August 2014