How your credit score affects the cost of borrowing
If you want to qualify for the most competitive loan and credit card rates then you need a good credit score. What’s more, you need it to stay that way. This guide explains why.
- How lenders decide whether to lend to you
- How a poor credit score affects your ability to borrow
- How your credit score can also affect your existing rate
- Your rights if your interest rate is increased
- What to do if your interest rate is increased
- How to repair your credit rating
How lenders decide whether to lend to you
Banks and credit card companies use a variety of different information to give you a credit score, which determines whether they will lend to you and at what interest rate.
Credit scoring can be based on information such as:
- What you provide on your application form
- What the lender might already have about you, based on previous accounts you have with them, and
- Your credit report, which is held by one of three credit reference agencies – Experian, Equifax and Callcredit
You’ll also get a better credit score if you:
- Are on the electoral register.
- Own your own home and/or have lived at the same address for at least a year.
- Are not connected financially, through your mortgage or joint bank account, to people with a bad credit score.
- Have a good credit history by repaying other credit agreements on time, for example your gas and electricity bills.
- Have evidence of stability – for example you’re employed rather than self-employed, you’ve lived at the same address, worked for the same company and had the same bank account for a long time.
How a poor credit score affects your ability to borrow
A poor credit score can mean you’re charged higher interest rates, given a smaller credit limit or simply rejected outright.
A lender doesn’t have to give you the interest rate they are advertising or that you see in best buy tables on comparison websites.
This is called the representative APR and it only has to be offered to just over half (51%) of people applying for the product.
You might be offered an interest rate that’s higher – this is what’s called your personal APR. You should check carefully what your personal APR is
How your credit score can also affect your existing rate
Lenders don’t just check your credit score when you apply for a new card or loan.
They also regularly review all of their customers and apply what’s known as ‘rate-for-risk pricing policies’.
Essentially this means that if you fall into a certain group based on your credit rating, and the lender decides that group is now a higher risk than previously, they will put up the interest rate for all the people in that group.
So even if you’ve been a good customer and always paid on time you could suddenly face a hike in rates.
That’s why maintaining a good credit score is essential even if you’re not looking to borrow any more money.
Your rights if your interest rate is increased
It can be upsetting if a lender does increase your rate.
You might find it makes a manageable debt suddenly unaffordable.
But credit card providers have signed up to a code of conduct and, while it’s not the law, they have agreed to give customers certain rights.
It’s important to know what they are so that you can check you’re being treated fairly.
What credit card providers have promised
Credit card companies have pledged:
- Not to increase your credit card rate within the first 12 months as long as you don’t breach the account’s terms and conditions. After that, it can only increase your rate once every six months.
- To tell you why your rate is being increased. Quite often the lender will state that it is because of your credit score, but if you can’t see any changes to your credit report then this might seem unfair.
- To give at least 30 days’ notice of any interest rate increase, so you have time to pay off your debt in full.
- To give you 60 days to close the account and clear the debt at the old interest rate in ‘reasonable time’, so you won’t be able to spend on the card anymore but you can keep repaying the existing debt at your previous rate.
- Not to increase the interest rate if you have a debt problem. So, if you’ve fallen behind in your payments then talk to a not-for-profit debt counselling agency and ask them to negotiate on your behalf.
How to complain
If you think you’ve been unfairly treated, you should complain to the lender first.
If you’re not satisfied with its response, you can complain to the Financial Ombudsman Service.
What to do if your interest rate is increased
Sometimes you can forget to make a payment on time and lose your competitive interest rate.
The lender has a right to do that but it’s worth phoning them and explaining why you’ve missed that payment.
If you have a history of managing your money well then this will show in your credit report, and the credit card company might relent.
You could also switch to a different credit card offering an interest-free period on balance transfers.
This can help you clear any outstanding balance.
However, if you have a poor credit score then you’re unlikely to qualify for these cards.
You should also be aware that lenders usually charge a fee on balance transfers.
This is typically a percentage of the overall balance you’re transferring, so it’s worth checking this.
How to repair your credit rating
The guides below can help you start to improve your credit score: