Poor credit scores put 20.2m at risk of paying extra £693 interest on credit cards

Poor credit scores are putting 20.2 million consumers at risk of paying an extra £693 interest on credit card balances according to new research by TotallyMoney.

The credit app has calculated the cost of a poor credit score for those with interest-bearing credit card balances finding that those with a credit card balance of £2,472, and those with a poor credit score could be paying an extra £58 per month (£693 per year) in interest when compared to those with a good credit score.

A person with a 75 point credit score increase could move a subprime borrower’s credit score into the prime score band, resulting in an average saving of £55 per month (£544 per year).

It was also found that people are paying interest on 54% of credit card balances, a 7% growth in the past 12 months.

With consumers paying interest on 54% of credit cards, those with a less-than-perfect credit score or no credit history could be paying considerably more for their borrowing. The number of adults with no credit history at all has grown by 29% in the last six years.

Poor credit scores and thin credit files can not only lead to customers being handed higher APRs on their borrowing, but they’re also likely to have access to fewer products, receive lower credit limits and be subject to shorter introductory offers. Additionally, they may end up paying more for other products too — seeing higher car insurance premiums, being forced onto more expensive prepayment energy meters, and finding themselves limited to pay-as-you-go SIM deals.

As inflation is expected to hit 11% in 2022, rising prices could mean that the average UK household would have to pay an extra £2,500 in 2022/23 to buy the same goods and services as in 2021/22.

These added financial pressures may put more people at risk of missing payments or increasing their credit account utilisation which may lead to further credit score harm.

Additional YouGov research, commissioned by TotallyMoney found that 51% of adults would have difficulty covering an unexpected bill of £500‡. That suggests that saving money by cutting interest on existing credit agreements could be a real difference to people’s finances.

Alastair Douglas, CEO of TotallyMoney said “1 in 5 adults had their personal income impacted by the pandemic and do not expect it to recover in the next two years†. To make things even more difficult, inflation is now at a 40-year high, and the cost of household bills and everyday essentials is continuing to rise.”

“With an extra £0.8 billion borrowed on credit cards in March and an annual growth rate of 10.8%§, figures suggest that consumers are turning to credit for help.”

“When it comes to credit, a good score can give you access to the best offers, meaning you’ll pay less for what you borrow. Those savings can be put towards paying off existing debts quicker or to help navigate the increased cost of living. Checking your credit report is free and doesn’t affect your score. So I’d urge everyone to do so.”

Andrew Hagger, Personal Finance Expert from Moneycomms.co.uk said: “It’s inevitable that some consumers will face a chronic financial squeeze this year, leading to late or missed payments on their financial commitments.”

“As a result, credit records will be damaged and mean 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 come as a big shock when people realise that they’re no longer eligible for best buy card offers and suddenly face credit card rates of 30% or 40% APR if they apply for new plastic.”