How a good credit score can save you money

Taking steps to boost your credit score and report can help improve your chances of getting accepted for credit, whether that’s a new credit card, loan or a mortgage. But your credit score doesn’t just help lenders decide whether or not to accept a credit application. It can also influence the interest rates and terms they could offer you.

Getting your credit score off the ground could be your ticket to some pretty big savings. And there’s no time to start like the present.

It’s all to do with risk. Lenders are really focused on risk - measuring it, monitoring it and most importantly, minimising it. Credit scores are also concerned with risk. They’re a way for lenders to calculate how risky it might be to lend to you.

Your credit score is based on your credit report, which is a record of how you’ve handled credit in the past. This helps lenders predict how you might handle credit in the future.

A higher credit score means your credit report contains information that shows you’re low risk. For example, your report shows that you’ve had a variety of credit over the years and that you’ve always paid your bills on time.

If you have a low credit score, or no credit score at all, it may make you seem riskier to lend to. In the eyes of the lenders there is a higher chance you won’t pay back what you owe. This means lenders might reject your credit application altogether.

But if the lender still wants to accept a ‘riskier’ application for credit, then they may offer you higher interest rates. By charging more, lenders are looking to make up for any losses they might make if you don’t repay your debts. This usually means that the greater the risk, the higher the interest rates. The lower the risk, the lower the interest rates.

If you take out a credit card, a loan or any other form of credit, then you’ll probably have to pay interest on the money you borrow. The higher the interest rate the more you’ll pay back over the course of the agreement.

When you’re looking for credit, the interest rate you see advertised is known as the ‘representative’ APR (annual percentage rate). But this is not necessarily the rate you’ll be offered, it’s simply an average rate.

By law, lenders do have to offer at least 51% of people who take out the product the advertised APR. But lenders can charge the other 49% of people completely different rates.

Whether you are offered the advertised rate, or a different one altogether, will depend upon how much of a risk you pose to lenders.

So a higher credit score can help you get those cheaper interest rates. This means that improving your credit score can actually help you make some pretty big savings. In fact, having an 'excellent' credit score (between 466-700 with Equifax) could save you £19,000 over the course of a lifetime, in comparison with having a ‘low’ score.

Lenders sometimes review all of their customers to see if their financial situation has changed.

If there’s been a change to your credit report which has caused your credit score to drop, there’s a chance the interest rate might be pushed up. If this happens the lender has to notify you first. It’s also worth asking your lender why they’ve done this. You’re allowed to close the account if a lender hikes up your interest rates. You just have to tell the lender you want to do this within 60 days of the increase. You can then clear the debt at the original rate of interest.

While you might not be able to predict exactly what interest rate you’re going to be offered, you do have the power to steer lenders in the right direction. Here’s how:

• Start taking steps now, to build up and improve your credit score.

• If possible, wait until your score improves before you apply for credit. This may prove especially important if you’re likely to be paying a lot of interest (e.g. on a mortgage).

• Once you’ve built up your score you may want to see if you can get a better interest rate by switching lenders. To find products you're eligible for, simply log in into your ClearScore account.