More than a third of credit card users don’t understand credit scores

New research by Compare the Market has found that only 17% of credit card users have a strong grasp of how credit scores are determined, while over a third (36%) admit to having limited or no understanding.

More than four in ten credit card users (46%) worry about maintaining a healthy credit score. However, the data reveals a significant gap in understanding how credit scores are determined across all age groups. Among younger adults, 21% of those aged 18-24 and 25-34 have no knowledge of the topic, similar to older groups, where 33% of those aged 45-54 and 46% of those aged 55 and older also lack understanding.

Nearly seven in ten of those with a credit card (68%) don’t realise that how long you’ve had your credit card will impact your credit score. If a borrower closes old accounts, it can reduce the average age of your credit history, which could negatively impact your credit score. Keeping old accounts open and in good standing shows lenders that you have a long history of managing credit responsibly.

The research also shows borrowers risk accidentally lowering their credit scores, as 58% are not aware using too much of their available credit could damage their scores. A low credit utilisation rate shows lenders that you’re only using a small amount of the credit that’s available to you and helps to prove you’re a reliable borrower. Concerningly, 34% are not aware that missing a repayment could damage their credit score. Late or missed payments can stay on your credit file for six years.
 
Perceptions of factors affecting credit scores vary widely by age. Only 29% of those aged 18-24 recognize that missing payments affect their credit score, compared with 60% of those aged 35-44 and 77% of those aged 55 or older.

Credit scores are figures used by lenders to decide if a person is a high or low risk when it comes to borrowing. It could also give an idea of how likely that person is to be accepted for credit. Credit scores are based on each person’s credit report, which is a summary of how they have managed credit in the past.

A low credit score can make it difficult to get approved for loans, credit cards, or mortgages. Lenders may see you as a higher risk and charge you higher interest rates. This means you’ll end up paying more in interest over time.

Charlie Evans, Money Expert at Compare the Market, said: “This research underscores the importance of financial awareness, particularly when it comes to credit scores and their impact on everyday financial decisions.  Your credit rating is something that will be taken into account when you rent or buy a property, as well as if you take out a loan or credit card.  It’s so important to shop around before taking out one of these products to help you understand your options and find a deal that suits you.”