Millions of consumers could end up paying more for borrowing due to the damage done to credit scores during the coronavirus pandemic, new research has found.
Borrowers could potentially find their credit scores hit as they utilise more short-term lending, apply for more products or in the longer term, default on credit agreements when payment holidays come to an end, according to research from money site Credit Karma UK.
Credit Karma estimated in April that nearly 5 million Brits expected to be unable to make repayments “in the following weeks and months” due to the economic impact of the coronavirus pandemic — highlighting how crucial repayment holidays were for the stability of household finances.
With unemployment expected to rise as the government’s job retention furlough scheme ends, average credit scores are expected to fall.
Someone going from a strong (the equivalent of 610 or above) to poor (of 550 or below) credit score could face paying an estimated £2,690 ($3,485) a year more in interest on any new borrowing, until they partially or fully recover their credit strength, according to the research.
Even recovery to a medium score (of around 580) could still mean paying additional interest charges of £740 a year until prime status is regained — meaning consumers who see their scores damaged during the economic fallout of COVID-19 could still find borrowing more expensive years after the crisis passes.
At the other end of the scale, “thin-file” consumers who have a poor score due to lack of any proven track record can also often find it difficult to secure credit or have to pay higher rates as a result. This is particularly prevalent among young people who have an aversion to borrowing.
One in three under 35s have never checked their score, according to Credit Karma.
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Some factors contributing to falling credit score have come from a lack of understanding around things like payment holidays. For example, in April, Credit Karma research showed widespread confusion among consumers around mortgage, loan and credit card payment holidays, with some people cancelling direct debits without speaking to their lender and others instead stretching themselves too thin financially because they were unduly worried a payment holiday would negatively affect their credit score.
The research worked out the total value of a good credit score is equivalent to £129,000 ($168,000) — in terms of the interest savings when comparing a good to poor score across a lifetime of borrowing (age 20-68), given those with better scores can secure lower rates for mortgage, credit cards, loans and car finance.
Separate research also shows that Brits now have a wider choice of credit cards and loans, because more lenders are returning to the market as coronavirus lockdown restrictions ease. Around half of lenders had previously withdrawn products.
People’s chances of getting approved for credit are now 60% higher than at the start of the lockdown, according to Experian’s Credit Barometer.
More than one in four (26%) borrowers could not find a single credit card they were likely to be accepted for at the peak of the lockdown, compared with just one in 10 (10%) that saw the same result at the beginning of March.
Amir Goshtai, managing director of Experian Marketplace said: “We understand this is a challenging time for many and not everyone will be in a position to attain credit. But people shouldn’t feel disheartened if they find their chances of being approved for credit are low.
“The market is changing daily and so is consumer eligibility. By building their credit score, consumers can put themselves in the best position to take advantage when lenders review their eligibility criteria.”