The real financial impact of a low credit rating

Posted by Michael Bolt in Credit Check on 4 March 2014 - Michael worked as a Credit Analyst at checkmyfile until 2015

An average middle income family with a poor credit rating could be paying up to £1,225 a year more on financial products than a family with an excellent credit history, a recent has found.

The report, 'The Cost of a Poor Credit Rating', commissioned by the credit card provider Aqua, attempts to quantify the financial cost of having a good credit rating compared to a poor one, revealing some shocking results.

Aqua's report, authored by Dr John Glen, a senior lecturer at Cranfield Business School, finds that many families have been unnecessarily spending money by missing out on better tariffs and deals because of their credit rating - adding hundreds of pounds to the cost of utility bills, mobile phone contracts and credit cards.

The study found that poor credit households of middle income – defined as having an annual after tax income of between £19,240 per annum and £25,480 per annum – could have to pay anywhere between £1,089 and £1,225 more on finance, than those with healthy credit scores. Those families with more occupants were also found to be hardest hit by the impact of a poor credit rating.

A range of goods and services were analysed during the course of the study including mobile phones, energy, car finance, credit cards, white goods and broadband.

The financial cost of having a good or a bad credit rating was most prominent when it came to car finance. The study found that an £8,000 car bought on finance would cost someone with a poor credit rating £6,798 extra in interest payments, while it would cost someone with a good credit rating £1,198 in interest in addition to the cost of the car.

The financial impact of a poor credit rating is also felt across everyday bills such as broadband, utilities, mobile phones and the cost of white goods. The study found that families with lower credit ratings can typically only access rolling monthly broadband contracts for example, meaning that they could face an annual bill of £174.48 for an average broadband package to avoid being credit checked. This compares with £59.88 for those with a good score.

The impact of a poor credit rating was also felt when it came to energy tariffs, with customers with a poor credit rating often only able to access more expensive pay-as-you-go tariffs, costing an additional £110 each year than cheaper 'fixed price' tariffs. The report also finds that families with a mixed credit history could pay an extra £1,500 a year on credit card interest and an additional £320 on white goods purchased on finance.

Dr Glen says,"Simply put, poor credit is costing households in the UK billions. It's alarming that often the people who need the most help are the ones who are charged more for everyday household products and services."

The findings of the report lay bare the financial impact a poor credit score can have and reiterate the importance of trying to improve and regularly checking your credit report.

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