Millions of consumers may find borrowing more expensive, years after the COVID-19 crisis, due to the damage done to credit scores during the coronavirus pandemic, it’s been suggested. Dents to credit scores due to extra credit utilisation and missed payments could potentially leave millions of borrowers paying more in interest for many years to come, according to Credit Karma UK.
The warning has come following research from the money website, which estimated the long-term cost for consumers who see their credit scores damaged during the economic fallout of COVID-19.
The analysis found the total value of a good credit score has been quantified at £129,000 in terms of interest savings.
This figure was found when comparing a good to poor score across a lifetime of borrowing (from age 20 to 68), given those with better credit scores can secure lower rates for mortgages, credit cards, loans and car finances.
It was calculated through independent analysis of market rates on lending products combined with typical consumer product use.
As well as highlighting the importance of credit scores, Credit Karma UK said the study also outlined how consumers could potentially find their credit scores impacted as consumers utilise short-term lending and apply for more products, or in the longer term, default on credit agreements when payment holidays come to an end.
In April this year, Credit Karma estimated that nearly five million expected to be unable to make repayments “in the following weeks and months” due to COVID-19 – showing how crucial repayment holidays were for households at the time.
Now, with unemployment expected to rise in the near future, Credit Karma is expecting to see average credit scores fall.
Ziad El Baba, General Manager of Credit Karma UK commented: “We rarely connect good credit scores with the actual money you end up saving on interest payments, so we want to highlight the difference of what a good vs bad score over a lifetime of borrowing can mean in pounds and pence.
“During this global crisis, we know millions of people may see their credit scores suffer through no real fault of their own, so we want to do what we can to help people understand what makes up the score and how it can be improved most quickly.”
So, what impact could a change in credit score have for borrowers?
Credit Karma UK gives an example, in which an individual goes from a strong ((the equivalent of 610 or above) to poor (of 550 or below) credit score.
The credit experts suggest they could face paying an estimated £2,690 a year more in interest on any new borrowing, until they partially or fully recover this credit strength.
And, if there is recovery to only a medium score (of around 580), then this could still mean they face paying additional interest charges of £740 a year until prime status can be regained.
It’s not just borrowers who may want to think about their credit score.
Those with an aversion to borrowing – particularly young people – can end up with a poor score due to a lack of any proven track record of borrowing behaviour, Credit Karma UK warned.
These people, dubbed ‘thin-file’ consumers, can therefore often find it difficult to secure credit, or have to pay a higher rate as a result.
For those wanting to improve their credit score, there may be steps they want to take.
According to Credit Karma, these include:
- Understanding what one is paying in interest across products
- Asking lenders about taking a payment break
- Considering low-rate products to help manage debt. But as lenders could tighten their criteria, first check what one might be eligible for
- Protecting and growing one’s credit score for the future.