Consumers could be paying thousands of pounds more in interest payments on personal loans and credit card balances because they are failing to check and take steps to improve their credit scores, according to research carried out by credit improvement service Credit Improver. Lenders use credit scores to determine who qualifies for a loan or credit card, and at what interest rate and credit limit.
Credit Improver looked at the typical interest rate a borrower could secure – depending on their credit score – on a £5,000 personal loan paid back over 36 months. It also looked at the typical rate a borrower might secure on a credit card, and how much interest they would pay if that card had a £3,000 balance, and they committed to paying 4% of the outstanding balance every month.
Taking a £5,000 personal loan paid back over 36 months, and comparing a borrower with an ‘Excellent’ credit score, between 961 – 999*, and someone with a ‘Very Poor’ credit score, between 0 – 560*. The former could secure a typical rate of 3.8% APR, with monthly interest payments of £8.14 and total interest paid over the duration of the loan of £293.08. However, someone with a ‘Very Poor’ score, may typically secure an APR of 79.4%, with monthly interest payments an eye-watering £162.96 a month, and total interest paid of £5,866.60 over three years. That’s a staggering £5,573.52 more interest.
Even a borrower with a ‘Fair’ credit score, between 721 – 880, could still pay more than £1,000 extra in total interest over the duration of the loan, as the typical rate on a personal loan would be 16.9%. Also, by improving your credit score from ‘Very Poor’ to a ‘Poor’ rating, you could secure a better loan rate of 29% rather than almost 80%, and reduce the total interest paid by more than £3,500.
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