credit score and its astonishing cost in your life

I have discovered what credit score is when I was first applying for my very first credit card. Thinking of credit card made me feel really important and a proper adult. I didn’t realise the power and the purpose of credit score at the time though. I quickly forgot the credit score term when I received the credit card. It was many years later during my application to get a mortgage for my very first flat I heard these words again. My mortgage advisor wanted to discuss my credit score and file. I was a bit ashamed of not knowing a lot about it and the state it was in. That’s when I learned the value and the meaning of credit score.

I have recently been talking to friends of mine who were starting to consider to get on the property ladder themselves. They however weren’t really sure how to start the process. One of the things I asked them – what was the state of their credit score? I started talking about the odds of getting the mortgage as well as securing a better deal. The look in the eyes of both of them was what made me realise that there might be a value of starting this blog. I realised that I want to share some tips and my personal experience when it comes to personal finance related topics. Sharing my journey has a potential for others to benefit from my mistakes and learnings.

do I have a credit score?

An opinion I have heard on many occasions from people who haven’t looked into the topic of credit score – I don’t have a credit card so I don’t have a credit score. This is wrong! Each and every single one of us has a credit score. Credit card is not a requirement for having a credit score. There is however a very strong link between the two which I will discuss in a separate post.

So what is a credit score you probably want to know by now…. Well in simple terms – credit score is a measure of how reliable you are to a potential lender. A combination of past financial decisions you made is what gives them this metric. Credit score is a number each one of us has. Credit score is updated weekly/monthly and changes up or down depending on what is added to your credit file. Your credit score allows the potential lender to quickly evaluate you and assign a risk level to you. The higher the score the lower the risk to the lender.

When I talk about lenders above – I don’t only refer to mortgage providers. Companies that use credit scores to asses you vary from your bank when it comes to getting a new card or taking out a loan, to mortgage providers, to mobile network providers in cases when you want to take out a deal on a new long term contract with a new handset or sim only deal and many others. I personally was denied a 2 year mobile phone contract back in the university days. This was due to me not having much history on my credit file. It was hard for the company to judge how risky I was. As a result they couldn’t agree to this long term deal I was after.

I made further mistakes unfortunately. After the first contract was rejected I went to the company next door and tried to apply for a contract there. No surprise – this got rejected as well. I have tried so with several companies within a very short period of time. It was a solid NO from all of them. All the applications within short period of time left a lot of bad marks on my file. The issue was – I didn’t realise at the time that getting a hard credit search pushes your credit score down for a set period of time. Hard credit search refers to company making an inquiry to data agency to see your file in a lot of detail. As a result of this an approval for your next application becomes less likely to be positive.

what is the cost of a poor credit score?

I then decided to simply get a 12 month sim only contract and buy a handset separately. I didn’t realise that 12 month contract is also seen as a long term financial commitment. Due to poor state of my credit file my applications were not successful.

The result was me losing out financially due to the lack of knowledge and understanding of what a credit score is and how to get it into the best possible shape. It wasn’t a major loss if I think about it now. At the time of being a student however and having a significantly different budget – it was a big additional expense. I had to take out a 30 day rolling contract. It costed me an extra £5 a month for the same deal I could have on a 12 monthly contract. On top of that I had to splash out for a new handset as well and pay the whole amount in one go.

The £5 a month that I had to pay in the uni days can turn into a massive amount for any one of us. It only takes one big purchase like a car or a house for you to see the real cost of this. An example of this is – a 5 year car finance worth £20,000 with interest rate moving from 3% to 4%. While the rate move doesn’t seem significant at first – this will add just over £520 extra through the term of your contract. You can quickly see how a bad credit score can really end up costing you significantly. Now imagine you are thinking of a £300,000 mortgage over 25 years. The same percent increase as above would set you back by over £45,000 over the period of your mortgage. These numbers are absolutely crazy to imagine!

While overpaying in the long run might be painful it isn’t the end of this. It is also worth keeping in mind that the riskier you are in the eyes of the potential lender the higher deposit they might ask you. Based on my personal experience – when buying a first home the extra 5% of deposits you might be asked for isn’t an easy task to find. This can significantly delay the process of getting on the property ladder for any one of us. 

I will discuss the factors that make up a good or bad credit score in a separate post. I will also share ways each one of you can easily check your personal score. There will also be tips on actions that you should take in order to keep on top of your credit score.