What is the cost of living in the UK with a Bad Credit score?
Below, we talk about some of the differences between having a good credit score and a bad one. As far as the financial institutes are concerned there are only 2 levels of scoring and you’ve either got it or you haven’t.
As far as borrowing money or gaining a credit line, which will allow you to pay for something with someone else’s money, you really are at the mercy of any financial institute’s rules (unless you are lucky enough to be able to borrow from a friend or family, but let’s not go into the pitfalls of that route in this article!!!!!) if they say you have to be squeaky clean to get the best rates, then that is what you have to be.
If they consider you to be a bad credit risk, it doesn’t matter if you don’t think so, they will put you in a category that will cost you a lot more when it comes to lending.
So let’s start with….. Your Credit Scoring
A credit score is one of the factors that determines the cost of living in the UK. This construct is a marking assigned to an individual based on their credit history. a person’s individual score is based on previous loans, credit cards, savings history, etc. The impact of the score will determine the cost of credit in the future, but crucially whether an individual can actually obtain credit.
Almost all banks and lending agencies in the UK look at a person’s credit score before determining whether to lend them money or not. An individual’s credit score also determines their potential credit limit, i.e., how much they can borrow based on their past record of repayments. But what happens if your credit score is too low? How would this impact your day to day life? There are a number of key aspects of life in the UK which can be impacted by a bad credit score including, but not limited to the following:
The most important thing to note is that there is no universal credit score in the UK. Major agencies such as Experian, Equifax, Noddle, etc. assign their own ratings based on their pre-determined criteria . So, a score tends to vary on a case to case basis. Nevertheless, there is a broad category which separates a “good” credit score from a “bad” one. In broad terms, a credit score of over 720 for Experian and 380 for Equifax is considered to be good.
Anyone can achieve such a score by paying their mortgages, servicing interest payments on time, and also paying bills regularly. So, it is not too hard to achieve a “good” credit rating as long as an individual keeps their debt repayments up to date.
Are you below the line?
There are many reasons why a large number of people may have a credit score which is less than 720 (Experian) or 380 (Equifax). Such a score is classified as “bad” or “poor” by banks and credit agencies in the UK . In such cases, this score can have a major impact on an individual’s life.
Firstly, having a good credit score will ensure that an individual can be eligible for 0% financing on various products such as motor vehicles. In contrast, a bad credit score will mean the individual will not be considered a good risk for these deals.
A major impact that a bad credit score has is that an individual will need to pay higher APRs on personal loans. This is because each lender carries out a full credit analysis on prospective customers based on their credit score before approving any personal loans or advances.
For example, in the UK, an average annual percentage rate (APR) for a personal loan of £2,000 and above stands at around 7% or below . The rate goes down if the loan value is higher. However, if your credit score is poor, these rates for the same amount can shoot up to 25% or even more than that.
These figures are even higher when you consider a short term or even a payday loan (however, APR figures are high on these types of loans whether you have good or bad credit for a reason, contact us if you are interested to know why?) This shows that a vast discrepancy exists in the cost of borrowing based on credit history.
Impacting day to day
In addition to restrictions on credit and high interests, a poor credit history can lead to being denied a mobile phone contract. If a credit history is not good enough and previous borrowings have not been paid off on time, applications for a new mobile phone contract can be easily rejected .
The four major factors which lead to this situation are bad credit history, missed payments, no bank account or lack of continuity. Although there are a few mobile phone agencies which offer cheaper handsets without any credit check, such cases are extremely rare.
The only option left for phones would be the use of a a pay-as-you-go SIM card which is not a preferred choice for many. Therefore, a bad credit score may lead to an individual having to rely on sharing mobile phones with others rather than having your own handset, which can be a major disruption in day to day life.
Considering buying your own home?
Furthermore, a bad credit score can also lead to a mortgage application being rejected outright. In 2014, the UK implemented the Mortgage Market Review . Buying a new property can be a very difficult task due to the changes in the law brought in by these processes.
In effect, an individual with a poor or bad credit score is I considered to be a “risky” individual, and therefore their chances of getting a mortgage application approved become much slimmer.
Further, even if someone manages to find a lender who is willing to assist them, the APR in such cases are astronomical. Buying a new property can thus become really hard with a bad credit score and ultimately alternative options for financing a home purchase need to be found.
Buying or Leasing a Car?
A bad credit score also impacts the ability to find a good financing deal in terms of buying a new car. Across the UK, the best available rates for new car financing are around 7% per annum. However, with a bad credit score, these rates could be up to about 25% per annum . This is because the individual’s credit history will be examined by the dealer as part of the contract process.
Additionally, it has been noted that in some cases, applications to buy a new car can be rejected altogether if the credit history is not favourable. This credit history is not limited to repayment of loans but may also include other aspects such as bills, credit cards, mortgages, etc. If any of these have negatively impacted a credit score, major hurdles in buying a car can be experienced.
In Summary
What all this means is that a bad credit score can have a major impact on daily life in the UK. from obtaining a mobile phone contract to a property, buying anything becomes much harder and in most cases much more expensive as well. Living with a bad credit score could therefore complicate an individual’s life and hinder their ability to have a sustainable lifestyle. In other words, it is critical to keep your individual credit score under control.