Young borrowers inadvertently put their financial futures at risk, as many are unaware of the harmful effects of missing out on loans or making credit card payments.

More than half (54 percent) of 16- to 24-year-olds were unaware that a missed credit payment could affect their score and negatively affect their chances of obtaining credit in the future, according to research by Compares The Market.

Nearly half did not know their credit score would be checked when applying for a credit card, and 45 percent were unaware that their credit history was also checked when securing mortgages or personal loans.

About 54 percent of people ages 16 to 24 are unaware that missed loan or mortgage payments can affect their credit score, according to Market Comparator

About 54 percent of people ages 16 to 24 are unaware that missed loan or mortgage payments can affect their credit score, according to Market Comparator

In the general population, more than two-thirds of people knew credit scores were used to check eligibility for credit cards, and only 71 percent were aware of their use for mortgages or personal loans.

The research described a lack of awareness among many young adults about the specific actions that affect credit scores, and found that many were unsure how to improve their rating.

“Credit scores are used by lenders to understand whether a borrower can purchase a product and assess their ability to repay it on time,” said James Padmore, head of money at Compares The Market.

Certain actions can affect your credit score, either positively or negatively, and our research shows that while young people believe they have control over credit, there is a significant knowledge gap.

“Having a low credit score early in life can unfortunately affect your ability to get a mortgage or a personal loan, for example.”

More than half of young people didn’t realize that a poor credit score could disqualify them from the most competitive deals, whether it’s a mortgage, personal loan or credit card.

Nearly three-quarters of them were unaware that being registered with the voter registry could have an impact on their credit rating, while more than two-thirds were unaware that the length of their credit history could affect their score.

County court rulings, individual voluntary agreements, and bankruptcies, all of which remain on a credit report for six years, are only known to have a negative impact on 43 percent of young adults.

Be wary of buy now, pay later schemes

Buy-now-pay-later schemes like Klarna are becoming a popular form of credit, with five million people using these products during the pandemic, according to the FCA.

These schemes enable shoppers to delay or spread the cost of a purchase over a period of time rather than paying the entire cost at once at the point of purchase.

More than half of Buy Now Pay Later users ages 16 to 24 have missed at least one payment on these types of purchases in the past year.

Although most schemes perform a simple credit search when a customer makes a payment—which won’t show up on an individual’s credit report—some products require a hard credit search.

This means that if shoppers miss a payment or fail to pay their debt in a timely manner, it can be flagged on their credit report and affect their ability to apply for credit in the future.

How can people check their score?

A credit report not only details an overall credit score, but also lists a person’s credit accounts, such as bank accounts, credit cards, utilities, and mortgages.

It will also display your payment history, including late or missed payments.

Young people will need to see their report first before they can have a better understanding of where they can improve.

There are a number of ways to view your rating and history for free.

Experian and Equifax both offer free 30-day trials of their online service, but you need to remember to cancel before the end of the promotion to avoid the subscription fee.

Ten tips to boost your rating

1) Register in the electoral register at your current address

2) Use the credit card responsibly and always try to keep a fair amount of credit available

3) Check your credit report regularly and ask that any errors be corrected

4) Do not withdraw money from your credit card

5) Restricting applications for new credit

6) If you have bad credit, stop applying for more credit

7) If you don’t have a credit card, get one – but just make sure you pay it off each month

8) Never miss a payment

9) Let your credit history mature

10) Do not keep unused cards

Experian will start charging you £14.99 once your 30-day free trial ends while Equifax goes back to £7.95 per month.

Checkmyfile also offers a free trial to check your reports with both Equifax and TransUnion UK – although after 30 days it starts charging £14.99 per month.

Instead, you are entitled to one free copy of your credit report every 12 months from each of the three major credit reporting agencies.

Free credit report options can also be found by visiting Credit Karma and Clearscore.

Why is it important to improve your score?

Your credit score reflects how reliable you are with credit, and affects your ability to borrow money.

Having a good credit score will improve your chances of getting a mortgage, credit card, or loan in the future and will give you access to better deals.

“I would always recommend that you watch your credit score especially if you are considering a mortgage,” said Andrew Montlake, managing director at Coreco Mortgage Brokers.

Lenders have credit scoring systems that are more difficult to pass if you only have 5 percent or 10 percent deposit for example.

“It is important to make sure there are no errors on your report and to work on improving your score where you can before applying for a mortgage.”

How can you improve your score?

There are a number of ways people can improve their score, including by registering with the electoral roll at their current address, using a credit card responsibly and making sure you don’t miss a payment.

A few small changes can make a big difference to ensure you’re accepted for credit later, like registering with the electoral roll, not opening too many accounts at once and keeping your credit card balances 25 percent under limits, Padmore said.

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