Young borrowers at risk of damaging their credit scores
Compare the Market found that while nearly nine in 10 (85%) 16 to 24-year-olds say they know what a credit score is and what it is used for, half (49%) were not aware that credit scores are used to check credit card eligibility.
A similar number (45%) were unaware that credit scoring is used to secure mortgages or personal loans, with more than half (54%) unaware that missed loan or mortgage payments could impact their credit score.
The study by the price comparison site found that – unsurprisingly – young people didn’t know as much about credit scores than older age groups. Of the wider population, nearly a third (31%) don’t know that credit scores are used to check eligibility for credit cards, and 29% are unaware they are used for mortgages or personal loans.
How to improve your credit score
Many of the young people questioned by Compare the Market were not aware of the small steps they can take to improve their credit rating.
Nearly three-quarters (72%) didn’t realise that registering on the electoral roll can have a positive impact on your credit score, while more than two-thirds (68%) were unaware that the length of your credit history also can influence your score. The longer you have a credit rating, the higher it usually is due to a longer history of repayments.
County Court Judgements (CCJs), individual voluntary agreements (IVAs) and bankruptcy – all of which stay on a credit report for six years – were also only known to have a negative impact by 43% of young people.
James Padmore, head of money at Compare the Market, said: “Credit scores are used by lenders to understand whether a borrower can afford a product and assess their ability to pay it back on time. Certain actions can impact your credit score, either positively or negatively. Our research shows that while young adults believe they have a handle on credit, there is a significant knowledge gap. Having a low credit score early on in life could unfortunately affect your ability to get a mortgage or a personal loan, for instance.
“Just a few small changes can make all the difference to ensure you’re accepted for credit later on, such as registering on the electoral roll, not opening too many accounts at once and keeping your credit card balances 25% under the limits.”