Credit scores rise during pandemic

During the pandemic there has been a rise in consumers’ credit scores, with the average score increasing from 776 in September 2019 to 797 in September this year, according to Experian.

The rise in credit scores could be down to some consumers having more disposable income during lockdowns, which they have used to pay down or clear existing debts. As well as this, although some consumers faced financial difficulties during the pandemic, the mortgage payment holidays offered by lenders did not impact credit scores, which has prevented some consumers from seeing their score fall.

Normally, a credit score will be impacted if a borrower fails to keep up with repayments on the debt, but when repayment holidays on mortgages and other types of debt were brought in at the beginning of the pandemic, it was stated that consumers needing to take a payment holiday would not see it impact their credit score. Those who had to continue taking a payment holiday after the initial incentive ended, however, would see it start to impact their credit score.

Lenders, including banks and building societies, will look at an applicant’s credit score to decide if they are a responsible borrower. Consumers with a high credit score will not only likely be accepted by the lender but will usually be offered the best deals, such as the longest terms on 0% purchase credit cards at the lowest interest rates the lender is offering. Those with a low credit score, however, will find it harder to be accepted by the lender, which can result in them being rejected for mortgages, credit cards and personal loans. As well as this, if accepted, they are usually charged a higher interest rate than the headline rate as the lender will see them as a riskier borrower.

Although some lenders, such as credit card lenders, will mainly look at credit scores when deciding whether to accept an applicant and what interest rate to offer, other lenders will take more factors into account when reviewing a borrower’s application. For example, a mortgage lender will not only look at the potential borrower’s credit score, but will also want to see at least three months’ worth of bank statements as past of the application process.

Even if the lender does look at more than credit scores when considering a borrower’s application, a high score will still likely impact the lender’s decision, as such it is usually a good idea to check credit scores before applying to borrow. Consumers can check their credit score for free online here, alternatively there are a number of credit check companies that allow consumers to check their scores which can be found here.

A credit score only looks at the credit history of the borrower, so the amount of savings they have or their monthly disposable income is not taken into account. Instead a credit score is impacted by the amount of debt the borrower has, the level of credit they have access to – for example their credit card limit – whether they missed repayments, the type of credit the borrower already has and if the borrower has made a lot of applications or obtained new credit recently. Normally, credit scores only take into account the borrower’s history over the previous six years.

A common misconception amongst borrowers is that if they do not have much debt this will result in a good credit score, however lenders use credit scores to determine how borrowers are at managing debt and, as a result, those with little or no credit may find it negatively impacts their score. This is why many young people, or those who have never taken out a credit card, personal loan or a mortgage, may find they have a poor credit score.

Another factor that will have a negative impact on credit scores is if the borrower has had a county court judgement made against them. If this has happened borrowers should look at starting to repair their credit score, perhaps using a credit repair card, to work towards improving their score.

Along with showing lenders they are responsible borrowers, consumers looking to improve their credit score can do so through a number of simple ways. For example, being on the electoral roll can help to improve credit scores, closing any unused credit accounts and having a credit card and repaying the balance in full each month. More tips on improving credit scores can be found on our how to improve your credit score guide.