Low credit ratings costs families £3.5bn
The average family with a low credit rating spends an extra £1,170 a year – or £3.5 billion in total – across utility bills, mobile phone and broadband contracts, credit cards, white goods and cars purchased on finance.
Their poor credit history means families are wasting cash unnecessarily by missing out on the best tariffs, according to research from credit card company Aqua.
The figures show that in some cases, the amount they are forced to overpay by can be as much as £1,225 more compared to those with good credit scores.
The issue is most pronounced when it comes to car finance deals. An £8,000 car bought on finance would cost someone with a poor credit rating £6,798 in interest payments, while it would cost just £1,198 for someone with an excellent credit rating.
That means the low credit score household pay an extra £1,120 every year for five years for the same car.
But the different in cost remains significant across everyday bills such as broadband. Families with lower credit scores can generally only access a month-by-month contract. To avoid being credit checked, they face an annual charge of £174.84 for an average broadband broadcast package, while those with healthy scores pay just £59.88.
For energy, low-credit families fork out £327 more on average, £402 for their mobile phones and £954 for white goods.
The research also found that 57% of adults in the UK are 'at risk' of being declined credit, as a result of a low credit score.
Dr John Glen, senior lecturer at Cranfield Business School - which conducted the research – said: "Simply put, poor credit is costing households in the UK billions. It's alarming that often the people who need the most help are the ones who are charged more for everyday household products and services."
Your credit score is a three-digit number (ranging from a low of 300 to a high of 850) calculated from the information in your credit report. Your credit score enables lenders to determine how much of a credit risk you are. Basically, a low credit score indicates you present a higher risk of defaulting on your debt obligations than someone with a high score. If you have a low credit score, any products you successfully apply for will carry a higher rate of interest commensurate with this risk.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.