How a poor credit rating can cost you an extra £1,200 a year

The cost of a poor credit rating can add up when paying for everyday goods and services.

Millions of middle income households with a poor credit rating are being forced to spend around £1,170 more than those with a good credit rating, according to new research.

The Cost of a Poor Credit Rating report, commissioned by credit card provider aqua and researched by Dr John Glen at Cranfield Business School last year, quantifies the direct cost of having a poor credit rating against obtaining everyday products and services.

The report is a follow up to the 2012 study Mind the Credit Gap which found that 57% of the UK adult population are at risk of being declined credit by mainstream lenders.

5.2 million middle income households (with an annual gross income of £24,500-£33,800) were used for the latest study, which draws on information from the Office for National Statistics as well as other national sources of data.

The research looked at the annual cost of utility bills, mobile phone contracts, broadband deals, purchasing white goods on finance, buying a car using a loan and credit card interest payments for those with a good credit rating compared to the cost for those with a poor credit rating.

It found that poor credit middle income households are paying between £1,089 and £1,225 more each year (depending on the size of a household).

Why some pay more

The best deals tend to be reserved for those with the best credit rating.

Those with a bad credit rating are deemed risky and more likely to default on payments so companies charge a premium to provide a service or when offering finance.

[SPOTLIGHT]Those with poor credit for example may not be able to take out a mobile contract, which requires you pass a credit check, so would have to use a Pay As You Go tariff instead, which may work out pricier.  This can be the case for broadband and energy too.

Meanwhile the cost of obtaining credit can also be disproportionate. Those with good credit tend to be offered the best deals on credit cards as well as finance for white goods or a new car, while those with a poor credit profile will be offered something worse and therefore more expensive.

The cost of poor credit

The Cost of a Poor Credit Rating report looked at six areas where polarisation can be prominent and highlighted the difference in the cost for these two types of credit profiles at a household level and also for all poor credit middle income households in the UK.

The results are shown in the table below:

*Calculations based on best British Gas energy tariff compared to standard ‘PAYG tariff’.

**16MB speed Plusnet 12-month contract to a Plusnet 16MB monthly contract.

*** Tesco Pay As You Go deal compared to SIM-only monthly contract.

****Average APR used for good credit was 17.46% and for poor credit was 35.9%.

*****Cost of five items; 32” TV, 14” notebook laptop, fridge freezer, washing machine and gas cooker. Items from Argos and towards the value end of a range.

******Based on £8,000 car with loan taken out over five years. N.B Each year there is only one new car bought per 3.42 households. The weighting has been used for extrapolating UK-wide costs.

As you can see from the table, in every scenario good credit households secure a better deal than poor credit households.

The extra cost of obtaining credit or finance is the biggest contributor to the polarisation in this study.

Poor credit households in the UK are paying £974 million more on car loans, £954 million more on finance for white goods and £483 million more on credit card interest payments.

How to get a better credit rating

The report highlights how those that need their money to stretch further are the ones having to pay more and the result is a significant amount of disposable income is being wasted that could be put to better use.

Luckily there are things you can do to improve your credit rating if it's not the best.

Check your credit report - You can get to the root of your poor credit problems by checking your credit report. You can get free 30-day trials with Experian and Equifax and free lifetime access to your Call Credit report via its Noddle website.

Get on the electoral roll - If you aren’t already on the electoral register you need to get on it as lenders use it to verify you are who you say you are. Registering is free and simple to do via your local authority council.

Pay all your bills on time - Make sure you never miss any repayments and pay your bills on time as late payments are recorded on your credit record.

Don’t use up all your credit - Try not to use more than 75% of your available credit to give an impression that you are in control of your spending. You’re better off having more credit and staying below the limits than having less credit and running it up to the limit.

Limit your applications - Applying for more than four forms of credit in a year can lower your credit rating so try to limit the amount of applications you submit. It’s advisable to not take out more than two forms of credit within a six month period.

Close down unused accounts - If you’ve got lots of credit cards or accounts you never use close them down. With unused credit cards lenders see you have the potential to borrow a lot of money even if you never do and with numerous accounts left open there’s a greater chance of becoming a victim of fraud as you won’t be checking statements regularly.

End unnecessary financial associations - Living with someone won’t impact your credit rating unless you are financially linked to them and take out a financial product jointly like a mortgage or a bank account. This association will last even if you stop living together. So make sure you remove yourself from joint products you no longer need and make sure your credit report is updated to reflect this.

Get a credit builder credit card- One way to rebuild your credit rating or to create a better profile for yourself is to take out a credit builder credit card. These encourage you to manage credit responsibly by using it and paying the balance off each month. The Aqua Classic MasterCard is one you could go for which also offers a free credit checker service for life worth £80. Read: Best credit cards if you have a bad credit history for more.

More on your finances:

10 astonishing lies about credit ratings

What REALLY damages your credit rating

Best credit cards if you have a bad credit history

The lenders who won't damage your credit score

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