Credit score warning: Millions could see borrowing costs rise by over £2,500 due to COVID

Credit scores are essential for anyone looking to borrow money for a mortgage or other big purchases. Some people have expressed worry that their ratings may take a hit in the coming months as the various payment freeze measures put in place by the government come to a close.

Both the government and the FCA assured the public that credit scores would not be affected by the usage of a payment holiday.

Despite this, Credit Karma UK have found that those who have been worst affected by the financial constraints of the COVID-19 pandemic could end up facing long term financial consequences.

They estimated the long-term cost in pounds and pence for consumers who see their scores damaged during the economic fallout of COVID-19.

In their research, the total value of a good credit score was quantified at £129,000 – in terms of the interest savings when comparing a good to poor score across a lifetime (between ages 20-68) of borrowing.

This figure was calculated through independent analysis of market rates on lending products combined with typical consumer product use.

The study outlined how consumers 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.

These issues could become more prevalent than many may realise, as Credit Karma estimated (using data from Opinium) in April that up to five million people expected to be unable to make debt repayments in the summer months because of coronavirus.

Unfortunately, with unemployment expected to rise as the furlough and SEISS schemes end, Credit Karma warned that they expect to see average credit scores fall.

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They provided the following example of how this could play out in practice: “In an illustrative example of someone going from a strong (the equivalent of 610 or above) to poor (of 550 or below) credit score, they could face paying an estimated £2,690 a year more in interest on any new borrowing, until they partially or fully recovered this credit strength.

“Even recovery to a medium score (of around 580) could still mean paying additional interest charges of £740 a year until prime status was regained.”

Ziad El Baba, a General Manager at Credit Karma UK, commented on the company’s findings.

As he detailed: “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.

“Some elements contributing to credit score deterioration have come from a lack of proper understanding around things like payment holidays.

“For example, in April, Credit Karma research showed widespread confusion around mortgage, loan and credit card payment holidays, with some cancelling direct debits without speaking to their lender and others instead stretching themselves too thin financially because they falsely feared a payment holiday would cripple their credit score”

In recent months, the FCA and wider government have extended several payment holiday measures which concerned mortgages, credit card repayment and other lending agreements.

For mortgage holidays, affected customers will be able to request or extend support into October 2020.

Along with the extension, which was announced in June, Christopher Woolard, the then Interim Chief Executive at the FCA, provided the following comments which highlighted that the regulator recognises the importance of the support being offered but cautioned that using holidays where they’re not needed could be hazardous: “The measures we have confirmed today will mean anyone who needs to can get help from their lender, if they are still struggling to pay their mortgage due to coronavirus.

“It is important that if a consumer can afford to re-start mortgage payments, it is in their best interests to do so.

“Customers should talk to their firm about the best option available for them.”

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