More than eight million people are on furlough and two million have recently claimed benefits. Many will be using credit cards to pay day-to-day expenses. But that can damage your credit record, which will make future mortgages and loans more expensive.
Experian is the biggest credit rating agency and, like its smaller rivals Equifax and TransUnion, produces a “credit score” for the tens of millions of us on its records. This score captures in one number the risk associated with lending to that individual. The higher the score, the lower the risk, and Experian’s score runs down from a perfect 999. At 960, you fall from very good to good, and at 560 or less you are in the worst category. So losing or gaining even a few points can be important.
Experian is the only agency to reveal some of the secrets of its scoring system. If your credit limit is over £5,000, you gain 20 points because your lender sees you as
a good credit risk. But if it is £250 or less, you lose 40. However, if you use more than half of that credit limit, your points start to go negative. If you use 90 per cent you will lose 50 points, but using less than 30 per cent will gain you 90 points on the sliding scale.
That is why a cut in a credit limit by your bank can damage your credit score. If your credit limit was £10,000 and you used £4,500 of it, that is good for your score. But if your limit is halved to £5,000 and you still used £4,500 of it, you are using 90 per cent of it and will lose 50 points, without any change in your behaviour.
The worst things to do are missing payments (minus 130 points) and defaulting (minus 350 points). But even if you pay everything you should when it is due, using your card too much can damage your score. Getting on the electoral roll and avoiding a constant overdraft will help.
NB: The three credit reference agencies calculate their credit scores differently and a lender may use your whole credit record rather than a score produced by an agency.
Paul Lewis presents Money Box on R4