New research by TotallyMoney has found that one in two people are paying banks interest on a total of £31 billion of credit card debt every month with the average outstanding monthly balance they’re paying interest on is £2,748.
Each year, on the average balance, those with a poor credit score could be paying £1,371 in interest compared to £657 for those with a good score (an extra £714). That saving could considerably improve people’s financial wellbeing, as 52% of adults would struggle to pay an unexpected £500 bill.
In the UK, more than 20 million people have a poor credit score or carry a high interest credit card. And each month, 49.9% of customers are paying interest on their outstanding credit card debt, with an average balance of £2,748.
Looking at the cost over a year, when carrying the average interest-bearing balance of £2,748, somebody with a good credit score (prime) could expect to pay £657 at a rate of 23.9%. This could increase to 49.9% for somebody with a poor score, costing them £1,371 per year — meaning they’re paying an extra £714 in interest.
Using the same data, we’ve looked at the monthly cost. Interest payments for a prime customer costs £54.73, with a subprime customer paying a total of £114.27 — a difference of £59.54.
In the past 12 months, credit card balances have grown by 8.7%, from £58.7bn to £62.6bn, with 49.9% of customers paying interest (on £31bn)*. In addition, the number of people with a poor credit score or carrying a high APR credit card has grown by 50%, from 13.6m to 20.1 million.
A poor credit score doesn’t just impact how much interest somebody pays on their borrowing, but can also lead to shorter introductory offer periods with lower credit limits, more expensive car insurance, and hamper their ability to access mobile phone contracts and Direct Debit energy payments.
Alastair Douglas, CEO of TotallyMoney said “Even in 2023, banks still rely on credit report data when choosing who to lend to. And a financial mistake you made a few years ago can soon come back to haunt you, costing hundreds of pounds in interest payments, resulting in more expensive car insurance, or stopping you from being able to get a mobile phone contract, or even being able to pay for your energy bills by Direct Debit.”
“For many, it might not be clear why you’ve not been accepted for the best offers, or how to move your money forward. And you’re not alone — 9.8 million adults lack confidence in making financial decisions — and banks aren’t forthcoming with telling customers how they can reach their goals.”
Andrew Hagger, Personal Finance Expert, Moneycomms.co.uk said “Continuing cost of living pressures mean that some consumers will continue to struggle to keep up with borrowing costs, leading to late or missed payments on their financial commitments.”
“The knock-on effect is that credit records will be damaged and will result in far higher interest rates if customers look for personal loans or credit cards in the future.”
“The cost of having a poor credit record will hit home when people realise that they’re no longer eligible for best buy card offers and suddenly face credit card rates of 35% APR plus if they apply for new plastic.”