Lloyds Bank has warned that a basic mistake could leave borrowers paying more than necessary on loans, mortgages, and other credit products. The bank highlighted that many people, particularly young adults, lack fundamental knowledge about how credit scores work, which can result in higher interest rates.
Key Factors Affecting Credit Scores
According to Lloyds Bank, several factors influence credit scores, including borrowing history, repayment history, joint accounts, credit account management, existing credit balances, moving addresses, and being on the electoral roll. Surprisingly, many young adults are unaware that simply being added to the electoral roll can improve their score.
Young Adults' Knowledge Gap
A new survey reveals that 18 to 24-year-olds are significantly less confident and informed about credit compared to older generations. Barely half knew that missing a loan repayment or bill could damage their credit score, and only 46% understood what a 'minimum repayment' is. This information gap could lead to long-term financial issues, with experts warning that young adults may be 'sleepwalking' into financial turmoil.
Additionally, some factors that young people think affect credit scores, such as income, do not. The survey found that 43% of young adults believed income had an impact on their credit score, which is incorrect.
What Does Not Affect Credit Scores
Lloyds Bank clarified that income and savings, receiving benefits, living with others without joint accounts, payment defaults older than six years, using a debit card, and soft credit checks do not affect credit scores.
Neil Kadagathur, Co-founder and CEO of Creditspring, commented: 'This research shows that many young adults are using credit before they fully understand the basics that keep them safe. Missing repayments, paying late, or misunderstanding terms can have lasting consequences. Lenders, regulators, and policymakers must ensure young people get the right information at the right time.'
Improving credit scores can be as simple as updating details on a credit file or changing money management habits, according to Citizens Advice. Higher scores provide more borrowing options at lower costs, while lower scores may result in higher interest rates or stricter conditions.
