New research among 18-25 year olds released by the Money Advice Service for Global Money Week reveals a worrying lack of knowledge about credit ratings among young adults and shows how it is causing them financial problems.
22% admit that they ‘know nothing’ about credit ratings – rising to as much as 29% in some areas of the UK.
42% of young adults admitted they don’t know what affects credit ratings, while 33% do not know why firms search credit ratings in the first place. Many 18-25 year olds wrongly believe credit ratings are checked to prove someone’s identity (19%), and to see if someone has a criminal record (12%).
57% admit they don’t know how a credit rating could be improved, and 38% have checked their credit rating in the past five years. 40% either are not, or do not know if they are, on the Electoral Register – one of the most important factors affecting someone’s credit rating.
20% said they had missed or been late paying a bill in the last 12 months alone – another key factor affecting credit ratings. 32% of this group said larger than expected bills were the main reason, while 30% reported that it was due to unexpected bills; and 18% admitted that they had simply forgotten to pay.
However poor credit ratings were not always down to missed payments; 25% of 18-25 year olds who have previously checked their credit rating reported that they found errors in their report.
The widespread lack of understanding is causing knock-on problems for many young adults with 20% saying that their credit rating has caused them financial problems. For example, half in this group (51%) reported trouble getting access to credit; almost a third (30%) said they had problems getting a phone contract; 18% reported that they had trouble getting a job and 22% said they had trouble getting a mortgage.
Overall, 22% of respondents said they had previously been rejected for credit – in many causes causing them to turn to worrying alternatives. Over a quarter in this group (26%) said they instead turned to unauthorised overdrafts when denied credit. One in six in this group (17%) said they used a credit card with a higher interest rate; 19% say they borrowed from friends or family; while 12% in the group borrowed from a payday lender.
Young women were found to have slightly less knowledge of credit ratings compared to young men with 23% admitting they ‘know nothing’ compared to 20% of young men. Young women were also more likely to have been rejected for credit – 24% vs. 20% for men.
There was shown to be a considerable difference between young men and women when it came to understanding how to obtain a credit rating. Amongst those who had not checked their credit rating in the past five years, 27% of women aged 18-25 said they didn’t know how to, compared to 18% of men.
Young adults in the North West know the least about credit ratings – a third (29%) admitted they ‘know nothing’. This compares to 14% in the East of England and East Midlands where 18-25 year olds have the highest knowledge.
Those in the South West are most likely to have been rejected for credit (28%) while those in the West Midlands are least likely (17%). 22$
Young adults in the North East have the most knowledge regarding improving their credit ratings – over half (52%) say they know how to. This compares to 38% in Scotland, the lowest in the UK.
Many are putting their credit rating in jeopardy by missing bill payments – nearly a third of 18-25 year olds in Scotland (31%) have missed a bill payment in the last 12 months, whilst in Wales only 13% say that they have.
61% of all UK adults admit they haven’t checked their credit ratings in the past five years; whilst 74% were unaware that they could obtain a report for just £2. One in five adults in the UK (21%) who had checked their credit report said they found errors.
Caroline Rookes, CEO of the Money Advice Service, said: “It’s worrying to find so many young adults misunderstand credit ratings – not just how they work, but misconceptions about what they are, and their purpose in the long-run. It’s especially concerning, given many are actively making – or on the verge of – serious financial decisions – such as borrowing credit or buying a home.
“A poor financial decision today – such as missing bill payments – will impact your future financial life; and as this research shows many young people face financial difficulties due to their credit ratings. So as well as understanding how your credit rating is used, you should also check it, to see what lenders and creditors see. If it’s not accurate get errors corrected – because these can negatively your credit rating. It’s never too late to get your finances in shape. Take steps to improve it today and you will reap the benefits in the future.”