Confidence in credit rises, but young risk paying over-the-odds on interest
Little credit history can leave you vulnerable to unfavourable interest rates on your borrowing.
Interest rate and inflation remain at record lows, wages are rising, and Brits are now feeling more confident about taking out credit.
This doesn’t need to be a bad thing. However, we recently did some research which suggests that younger borrowers risk paying over the odds for things like credit cards, overdrafts and loans as they don’t realise that a poor credit score will impact the price they pay for credit.
In the survey of over 2,000 consumers, while we found that more than half (51%) of 25-34 year olds feel more confident about taking out credit than two years ago a huge 3.7 million (42%) people in this age group admitted they do not check their credit score or even know what it is.
To qualify for the most competitive loan and credit card rates, you need a good credit score. And you have to keep it that way. That means actively managing it on a regular basis – something the majority of younger people currently aren’t doing.
It could be that many don’t know their credit score affects more than just whether you’ll qualify for credit. It can also determine the interest rate you’ll be offered and often the higher your credit score, the lower the interest rate you will be offered.
Those in the lower band credit score (“very poor or poor”) can pay as much as £400 more in interest on a typical £2000 credit card balance when compared to the interest charged to someone in the highest credit score bracket (“excellent”). Interest rates can vary by 16% between the best credit cards (generally only available to those with an excellent credit score) and the worst cards in the market.
Young consumers, taking out credit for the first time, are particularly vulnerable. Ironically, because they have no credit history, lenders have no evidence they can repay on time meaning they see them as higher risk and score them lower. The fact this age group often live in rented accommodation and move address regularly compounds the problem. Taking a few simple actions to get their score information in order first can result in big savings and less hassle during the application process.
Our data also proves that people struggle to manage their credit score because of the cost, with 40% saying the £15/month fee credit check companies charge for access stops them looking. In fact, more than 7 million (82%) of 25-34 year olds said they would be more likely to check their credit scores if they were free.
If you’re faced with the choice of using your spare cash to check your credit score or pay for something like a gym membership or phone contract, it’s obvious which you’re going to choose. We want to completely remove the cost barrier to ensure young people can actively manage their score. That’s why we’ve launched ClearScore so everyone can get the best deal possible.