Ways having a good credit report can save money from credit cards to mortgages
Having a good credit report has a lot of benefits and can help you save money.
There are three credit reference agencies - Equifax, Experian and TransUnion - which lenders use to check your financial background.
Each one will hold information on how you’ve managed debts, bills and payments in the past, to help lenders determine if you're a responsible borrower.
You will also be given a credit score by each of the reference agency - many assume everyone has one definitive credit score, but this isn't the case.
Your credit score is simply a view from one agency - lenders will have their own scoring system to decide whether to lend to you.
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But generally speaking, the higher your credit score, the more you are likely going to be accepted for credit - including mortgages, phone contracts and credit cards.
If you have a good credit history, then this can help you save hundreds, or even thousands in some cases, when you take out a loan or mortgage or get a credit card.
Here we explain ways having a good credit score can save you money in the long run.
Better interest rates on credit cards and loans
When you apply for a credit card or loan then a lender will base their decision on risk - in a nutshell they will ask themselves how risky it might be to lend to you.
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.
As a result, you can usually expect to score a lower interest rate, which will save you money over the life of the loan or credit card.
If you have bad credit history, or no credit score at all, it may make you seem riskier to lend to.
In the eyes of the lender, there is a high chance you might not pay back what you owe - so they will give you higher interest rates or could reject your credit application altogether.
By charging more, lenders are looking to make up for any losses they might make if you don’t repay your debts.
According to Experian, if you applied for a £10,000 personal loan and want to pay it off over five years and have an “Excellent” credit score, you may qualify for a 11.2% annual percentage rate (APR).
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This rate would give you a monthly payment of £218.42 - in this case, you'd pay £3,105.38 in interest over five years.
However, if you have a “Fair” credit score, you may qualify for a slightly higher rate of 21.1% APR.
This would increase your monthly payment to £271.10, and you'd end up paying £6,265.79 in interest over the life of the loan.
You are offered better interest rates when you have a good credit score - this will save you money in the long run (Getty Images/iStockphoto)Better mortgage deals
Quite simply, a mortgage is a big loan and most likely the biggest loan you will ever take out in your life and again what mortgage deal you are offered will be influenced by your credit score.
Those with the best credit reports are more likely to get a lower interest rate on their mortgage, although other factors such as the size of your deposit also affect the rates you're offered.
Really, mortgage lenders want to see that you can afford your mortgage before they lend to you so your credit score isn't the only factor they look at.
So alongside your credit history, they will look at how much you earn, how much goes out each month, and not just credit repayments by fixed costs such as childcare and Council Tax.
If you can show them you can afford your monthly mortgage repayments, even if your life situation changes or if interest rates rise, like they currently doing so, you may still be able to get a mortgage if your credit score isn't the best.
More expensive mobile phone deals
Believe it or not, your credit report is checked when you get a contract for a mobile phone.
This is because the company is spreading the cost of the mobile handset over the length of the contract - so effectively for the firm it is a loan.
If you have a bad credit report, you may not be accepted for a particular mobile phone contract.
However, you can be approved for a phone contract on bad credit.
Depending on the value of the handset you are interested in, your credit history will matter more or less to the provider.
A cheaper phone will require less rigorous credit checks as the instalments owed will be smaller while a more expensive smartphone may have stricter terms.
Sometimes you may be able to pay a deposit as security for the handset or provide a guarantor as proof that the money will be received even if you cannot pay.
You can always opt for a SIM-only contract if you are struggling to be approved for a handset phone contract and if you make all the payments on time, this will help improve your credit score.
If all else fails, you should purchase a pay-as-you-go contract.
If you aren’t able to get mobile phone contracts with one provider, for instance, you can try the ones offered elsewhere - you should always check around and see what is out there.
Although you should not apply for lots of providers at one as each application requires a another credit check that can lower your credit score.
More expensive insurance plan
When purchasing an insurance policy, most providers will want to check your credit report and the level of checks they do does depend on how you intend to pay for it.
Some insurers may refuse your application if you have a bad credit score - but again, there are many insurance providers out there so you may be able to find a deal if you shop around - although your choices may be limited.
If you choose to pay for your insurance monthly, rather than annually, your insurance provider will likely do a hard credit check as you will need to be able to keep up with the monthly payments.
This will show up on your credit report and other lenders can see it.
A low credit score likely signals to insurers that you are more likely to make a claim which can add a hefty chunk onto the price of your car insurance.
You will also be charged interest on your insurance plan which will make it more expensive.
You most likely won't need a credit check if you are paying your insurance upfront in one lump sum payment - paying annually could also be cheaper as you won’t be charged interest.
What is a good credit score?
Credit reference agencies all rate you slightly differently and in the UK there are several companies which you can get your score from.
Your credit score can be different depending on the site you use - this is because each score will be dependent on the data it uses.
The three biggest sites where you can get your credit score include Experian, Equifax and TransUnion.
A "good" credit score from each of these consists of:
- Equifax - 531+
- Experian - 881+
- TransUnion - 604+
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