Poor credit score can cost £270,000 over a lifetime

It’ll cost borrowers with a poor credit score around £270,000 more in interest repayments over their lifetime compared to those classed financially sound, according to analysis by Credit Karma.

The credit checking company’s research found that a 20-year-old with a poor credit rating could rack up £551,787 in interest payments by the time they’re 68 if they fail to improve their credit score.

That’s nearly double the £279,485 those with a ‘good’ rating are expected to spend on interest on their mortgages, unsecured loans, car loans and credit cards over their lifetime.

With the Bank of England hiking interest rates 14 times consecutively, a poor credit score now costs more than twice as much as it did in 2020, when the extra interest was £129,073 over a lifetime.

What’s a credit score?

A credit score is a number that shows your creditworthiness to lenders – scores range from 300 to 850.

The higher your credit score, the more likely you are to get approved for loans and for better rates.

Your credit score is based on your credit history and includes information like the number of accounts you hold, total level of debt, repayment history and other factors.

Lenders use your credit score to evaluate your credit worthiness and the likelihood that you’ll repay loans in a timely manner.

How do credit scores work?

Your credit score can significantly affect your financial life. It plays a role in a lender’s decision to offer you credit. Lenders are more likely to approve a loan when you have a higher credit score and are more likely to decline when you have lower scores. You can also get better interest rates when you have a higher credit score, which’ll save you money in the long term.

Every lender defines its own credit ranges and lending criteria but in general they are categorised like this:

• Excellent: 800-850
• Very good: 740-799
• Good: 670-739
• Fair: 580-669
• Poor: 300-579

What can you do to improve your credit score?

When information is updated on your credit report, your credit score changes and can rise or fall based on new facts. You can actively try to improve your credit score by:

• Paying your bills on time – six months of on-time payments will noticeably improve your score
• Increasing your credit line – if you have a credit card, ask for a credit limit increase. It’s important not to spend this amount – just having it available with improve your score. Also try to pay down any outstanding debts
• Don’t close a credit card – if you’ve paid off a credit card, it’s best to stop using it instead of closing the account as this can hurt your credit score
• Correct any errors – you are entitled to free credit reports. Check them annually, report any mistakes you come across and ask to have them removed