1 in 5 young adults know nothing about credit ratings

A large proportion of young adults admit they know nothing about credit ratings.

The Money Advice Service (MAS) has released details of its latest study, which showed more than one in five (22 per cent) people between the ages of 18 and 25 stated they had no idea what they were, or how they could affect their finances. This figure rose to 29 per cent in some areas of the UK.

Analysts warned this lack of knowledge has created significant issues for young adults, with 20 per cent of respondents claiming their poor rating has caused them financial problems. Around half of those in this group (51 per cent) stated they had difficulty obtaining credit, while 30 per cent admitted they had been refused a phone contract. A further 18 per cent advised they had trouble getting a job and 22 per cent experienced difficulty while attempting to find a mortgage.

One of the most common reasons for poor credit histories was non-payment or the late settlement of bills. 20 per cent of those questioned stated this had happened to them in the last 12 months. When asked why this had occurred, 32 per cent claimed they had been charged amounts larger than they expected, 30 per cent stated they had received an invoice they were not expecting, while 18 per cent admitted they had just forgotten to pay. Meanwhile, a further 25 per cent of respondents stated they had found errors when checking their credit history. 

The report also showed two-in-five people aged between 18 and 25 did not know what affected their rating, while 30 per cent failed to understand why businesses checked it in the first place. 19 per cent of respondents believed the report was there to prove someone's identity, while 12 per cent thought it could be used to see if somebody had a criminal record. 

In addition, 57 per cent admitted they did not know their credit history could be improved and 38 per cent had not checked their report in the last five years. A further 40 per cent of those questioned were either unsure if they were on the Electoral Register, or were not there at all. This is said to be one of the most important factors affecting somebody's rating.

Meanwhile, 22 per cent of those surveyed stated they had been refused credit in the past. Out of this group, over a quarter admitted they had gone into an unauthorised overdraft. 17 per cent used a credit card with a high rate of interest and 19 per cent borrowed money from friends or family. A further 12 per cent advised they had resorted to using a payday lender. 

The study highlighted a wide regional variation, both in terms of awareness and how many people had been refused credit. Those in the north-west knew the least about the ratings, with 29 per cent of respondents in this area admitting they had no idea what they were about. This is compared to 14 per cent in the east of England and east Midlands, which showed the highest level of understanding.

Young people in the south-west were more likely to have their applications rejected (28 per cent), compared to just 17 per cent in the West Midlands. Additionally, the report showed 52 per cent of respondents in the north-east understood ways to improve their rating, making this the most knowledgeable region on this subject.

Caroline Rookes, chief executive officer at MAS, commented: "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 serious financial decisions, such as borrowing credit or buying a home."

The survey also highlight a more-widespread problem surrounding credit rating knowledge. 61 per cent of UK adults admitted they hadn't checked their history in the past five years, while 74 per cent were not aware they could obtain a copy of their report. Of those that had done so, claimed they had noticed errors.

By James Francis