The cost of bad credit: understanding the consequences of poor credit ratings

Obtaining a 'good' credit score is essential in today's financial landscape, so why are nearly 70% of Brits unaware of their score?

Failing to understand the weight of your credit rating can significantly impact your wellbeing and limit your opportunities, which is why it's fundamental you gain a clear understanding of what it is and how you can improve yours.

Admittedly, it can be a complex concept made worse by conflicting opinions, advice, and beliefs. On top of this general confusion, we're also dealing with a cost-of-living crisis in a post-pandemic world. No one can blame you for feeling a little overwhelmed.

Fortunately, Jonathan Such, Head of Sales at First Response Finance has put together this ultimate guide to fuel your knowledge and give you the necessary tools to take control of your finances.

What is a credit rating?

Let's first understand exactly what a credit rating is.

Definition from Oxford Languages: "an estimate of the ability of a person or organisation to fulfil their financial commitments, based on previous dealings."

Essentially, it's an evaluation that predicts your ability to pay back a debt. Each time you borrow money, such as receiving a bank loan or purchasing a product using finance options, this information is logged and how you respond to the debt is monitored.

It's here where the role of credit agencies really come into force. In the UK, there are three main organisations (TransUnion, Equifax, and Experian) that work with the likes of banks, mobile phone companies, and other major retailers to help these businesses determine whether the person applying for credit is likely to pay it back.

While each agency has its own scoring system – and will therefore produce different scores for the same person – they consider the same factors:

• Payment history
• Credit utilisation
• Length of credit history
• Types of credit used
• New credit applications

Now you have a better understanding of what a credit rating is, let's explore what a 'bad' score looks like and how you can improve yours.

Understanding a poor credit rating

A credit agency will give you a low (poor) credit score if you have a history of failing to pay your bills on time, or if you owe too much money. Here's what each agency classes as poor:

• Experian: 561–720 points
• Equifax: 280–379 points
• TradeUnion: 601–660 points

The impact of a low credit score rating could be detrimental to your quality of life and significantly restrict your financial opportunities. Consequences could include difficulty in obtaining loans or credit, higher interest rates, and limited access to financial opportunities such as credit card options.

But what should you be wary of? Common reasons for poor credit ratings include late or missed payments, high credit card balances, and too many credit applications.

Some personal debt is normal, especially in young families or small business owners, but it's how you handle that debt that can determine what your financial future looks like.

How to improve a poor credit rating

If your credit score isn't quite what it should be, don't panic! There are steps you can take to ensure you improve your rating at a steady speed and enjoy all the benefits that come with a good score. Here are a few things you can try:

• Pay all bills on time
• Pay off credit cards
• Maintain a diverse credit mix
• Limit new credit applications
• Check credit reports regularly

Jonathan said: "It's not the end of the world if you have a bad credit history, but it can make things unnecessarily difficult.

"For example, First Response Finance offers clear and simple vehicle finance agreements even for those with a poor rating, however you'd likely find it incredibly stressful and challenging to get a mortgage loan approved.

To avoid disappointment, start taking the necessary steps to improve your credit score today. It's never too late to give yourself the best possible start at securing credit in the future, even if it's something you don't think you need right now."

Seek professional help if you think you might need it

If you think your credit score is beyond repair using the above steps, it's time to enlist professional help. You can get free, confidential, and independent advice on dealing with debt problems to get you on the road to recovery.

This should make improving your credit score a whole lot easier, which is the best outcome if time is of the essence, and you need to move quickly. There is absolutely no shame in asking for help if you need it!

The more you learn, the more you earn

The subject of credit ratings can feel incredibly confusing at times. With so many boxes to tick, not to mention the different (sometimes contradictory) advice you'll find from various agencies and sources, it can be hard to know exactly what to do and if it's even working.

Be patient and keep working hard towards a 'good' score. You deserve the stability and reassurance.