Joint research by TotallyMoney and Moneycomms has highlighted the true cost of a bad credit score as low scoring borrowers miss out on the best deals.

Borrowers with a lower credit score are charged higher interest rates because they’re seen as a greater risk by a bank or lender. However, few people realise just how much of an impact this can have.

When it comes to mortgages, someone with a decent credit record buying a £230,000 property with a 90 per cent loan-to-value mortgage of £207,000, could potentially get a five-year fixed rate with HSBC at 2.29 per cent with a £999 fee. This would cost £906.90 a month.

But a borrower with a poor credit score would most likely have to approach a lender such as Aldermore Bank which would charge an interest rate of 4.68 per cent with no upfront fee. This would cost £1,172 a month. Over five years the Aldermore deal would cost £14,907 more than HSBC’s mortgage.

Researchers found that someone with a poor credit record paying a £3,000 credit card bill over two years could pay £1,979 more in interest than someone with an excellent credit rating. The calculation compared the cost of borrowing on a 0 per cent purchase credit card with Vanquis’ sub-prime credit card which is aimed at people with a low credit score and charges an APR of 69.9 per cent.

Calculations also suggested that someone with a poor credit history could pay an extra £7,453 on a £7,500 loan over 48 months compared to someone with a good credit history. The calculation used a best buy personal loan rate of 2.9 per cent APR (available from Admiral, John Lewis Finance or M&S Bank) with a guarantor loan from Amigo charging an APR of 49.9 per cent.

Alastair Douglas, CEO of credit experts TotallyMoney, said: “The extra fees people pay for having a bad credit score are huge. Taking the time to check their report means they can understand why this might be happening.

“Lenders review a customer’s credit report when they apply for a product. With a bad score, they’re more likely to charge a higher APR, offer less interest-free months, or even reject an application.

“Being informed about their score can help people to see where to improve and how to get the best deals. A report shows customers up to six years of credit history, and how much credit they are currently using.”

Reviewing a credit report is the first step customers can take to improve their score. Once people know where they stand, they can take the necessary steps to increase their score and have a better credit profile.

With an improved credit rating and score, customers can get better deals on all types of credit. This means more interest-free offers, lower APRs, and greater choice. With this, customers can get a mobile phone contract, or spread the cost of big items over a number of months, such as furniture or a new car.