MILLIONS of Brits could find borrowing more expensive because of the damage done to credit scores during the Covid-19 pandemic, a new report warns.
A customer with a strong credit rating who has dropped to a poor one would face paying £2,690 a year extra on any new borrowing, research by Credit Karma claims.
It claims people may find their credit scores hit if they apply for more cards or loans or default on credit agreements during the coronavirus crisis.
The company estimated that in April nearly five million expected to be unable to make repayments in the following weeks and months because of the pandemic's effect on their finances.
Rising unemployment as the furlough scheme ends could make things worse, it was estimated.
Even if a credit score recovered to a medium rating it would still mean paying £740 a year extra in charges.
How to cut the cost of your debt
IF you're in large amounts of debt it can be really worrying. Here are some tips from Citizens Advice on how you can take action.
Check your bank balance on a regular basis - knowing your spending patterns is the first step to managing your money
Work out your budget - by writing down your income and taking away your essential bills such as food and transport
If you have money left over, plan in advance what else you’ll spend or save. If you don’t, look at ways to cut your costs
Pay off more than the minimum - If you’ve got credit card debts aim to pay off more than the minimum amount on your credit card each month to bring down your bill quicker
Pay your most expensive credit card sooner - If you have more than one credit card and can’t pay them off in full each month, prioritise the most expensive card (the one with the highest interest rate)
Prioritise your debts - If you’ve got several debts and you can’t afford to pay them all it’s important to prioritise them
Your rent, mortgage, council tax and energy bills should be paid first because the consequences can be more serious if you don't pay
Get advice - If you’re struggling to pay your debts month after month it’s important you get advice as soon as possible, before they build up even further
Groups like Citizens Advice and Money Advice Trust can help you prioritise and negotiate with your creditors to offer you more affordable repayment plans
Banks, credit card, loan and finance firms have offered a raft of support - including three-month mortgage holidays and increased overdrafts.
But while your credit score will be safeguarded under new rules when taking out some of this help, not everything is covered.
The UK's three credit reference agencies, Equifax, Experian, and TransUnion have agreed to a special measure called an “emergency payment freeze".
This means, where you agree a repayment holiday or payment freeze with your lender or you temporarily reduce repayments this won't affect your credit score.
How to improve your credit score
WE explain how to improve your credit score.
- Don't make too many credit applications - Making lots of requests in a short period of time can be seen as a sign of financial distress - and each application will be recorded on your file. Use a "soft-search" eligibility calculator to show how likely you are to be accepted.
- Always pay your bills - Late payments are also recorded in your file so make sure you pay your monthly bills on time including utility and credit cards.
- Pay down your debt - Try and cut down your existing debt before applying for new credit as lenders may be reluctant to lend to you if you already have a large amount of debt.
- Use a credit-builder credit card - These cards tend to have high interest rates compared to normal cards but if you can show you're a responsible spender with them, it can improve your chances in the eyes of lenders.
But where you take out new credit or add to your existing borrowing this is likely to be reported to credit reference agencies as usual.
Ziad El Baba, general manager of Credit Karma UK, said: "During this global crisis, we know millions of people may see their credit scores suffer through no real fault of their own."
Most read in Money
Earlier this month, we reported on the Bank of England's warning that the number of Brits being rejected for credit has soared.
And experts warned that the situation "was only going to get worse".
While those who took out "payment holidays" during the crisis may find it harder to get a mortgage.