A poor credit score could cost £272,302 in additional interest over a course of a lifetime (ages 20 – 68) compared to a good credit score. The in-depth study by free smart money platform, Credit Karma, found that someone in their 20s, who has a poor credit score, will pay hundreds of thousands of pounds more for borrowing across their lifetime if their credit score does not improve.
The data comes at a time when borrowers are already contending with the highest interest rates in over a decade. The study includes an independent analysis of market rates on lending products combined with typical consumer usage of these products, for mortgages, credit cards, unsecured loans and car loans, to bring attention to the importance of maintaining a good credit score.
The analysis found that people with poorer credit scores will pay up to an extra £8,191 per year in interest in their 20s, averaging out to up to £5,673 per year over a lifetime of borrowing. A person in their 20s with a good credit score will pay an average £279,485 in interest over a lifetime across mortgages, personal loans, credit cards and car finance, whereas if they had a poor credit score it could rise to £551,787 over the same timeframe if their credit score does not improve.
The biggest additional interest costs occur on mortgages with an expected £163,197 additional interest calculated for borrowers with a poor credit rating.
The same analysis was initially conducted in 2020 and since this point, the gap between a good credit score and a poor one has widened by an additional £143,229, meaning it has become even more costly for those with poor credit to borrow, putting them at a severe disadvantage.
Credit Karma’s Great British Credit Report found that nearly three quarters (70%) of UK adults currently use credit and 48% don’t pay off their full balance each month. According to the study, nearly one in five Britons (17%) only pay the minimum balance on their debt. This study also found one in seven (15%) people are using more than 50% of their total credit limit.
Akansha Nath, Head of Partnerships at Credit Karma UK said “A credit score can be an abstract concept for many people. We want to show the reality of having a good credit score and how this helps people save money on interest payments over their lifetime. We hope this study will give people a reason to check their credit score today and start working towards those savings.”
“Interest rates are at their highest in a decade and are expected to continue to rise. Credit Karma wants to help people understand what makes up the score, and how to improve it so they can get the best rates available at this time.”