Knowledge is power when it comes to getting the credit you want. Start by understanding the impact your credit history has on the type of offer you get – or whether you get an offer at all.
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Your credit history is reflected in your credit report, which lists credit cards, loans, mortgages and other credit accounts, your repayment track record and information such as bad debts, IVAs and bankruptcies. Lenders use this, along with details from your application, to decide whether there’s a good chance that you’ll repay what you owe, so it’s crucial to understand what items will and won’t influence them. You can see your credit report for free with CreditExpert.
Here are the top ten credit myths – and the truth behind them.
1. Previous occupants of my address affect my credit rating
It makes no difference if the previous occupant of your home was a millionaire or a bankrupt as long as you do not share a financial connection, such as a joint account. Lenders are only interested in your ability to repay them on time and in full. They do like to see stability, though, and if you’ve recently moved they will want to know your previous address, so they can check back.
2. Credit reference agencies make lending decisions
Credit reference agencies – Experian is the UK’s largest – compile and hold your credit report securely. They don’t make decisions. That’s up to lenders, who use the information in your report, along with items from your application, when they calculate your credit rating.
3. Past debts don’t count
Unfortunately, they do. Court judgments for non-payment of debts, IVAs and bankruptcies stay on your credit report for at least six years. Even a missed repayment is recorded for at least three years. Any of these could count against you, because lenders could think that you will miss payments with them too.
4. If you’ve never borrowed, you’ll get the best deals
If you’ve never borrowed, lenders have no way of predicting how reliable you’ll be in the future and may even reject you. Most of them would rather see a credit report showing a few well-managed loans or cards and regular repayments.
5. I could be on a blacklist
Blacklists don’t exist and your credit rating doesn’t take account of your race, ethnic origin, religion or gender. Factors lenders do consider include your repayment history and how much you already owe. They want to be sure that you aren’t taking on more credit that you can comfortably manage.
6. Friends and family living at my home affect my credit rating
Unless you share a financial connection with any of them – for example, a mortgage or joint credit card account – friends and family have no impact on your credit rating. If you do have a financial connection, lenders may look at their credit report as well as yours when you apply for new credit, as their circumstances could affect your ability to make repayments.
7. Repaying your credit cards in full depresses your credit score
Nonsense. In fact, you’re likely to get a better credit score, because it shows you can afford your borrowings. You’re more likely to get a lower score if you skip payments or make them late.
8. It doesn’t matter how many credit accounts you have
Lenders want to be sure that you can afford the credit they grant, so they prefer it if you don’t already owe large amounts on multiple accounts. They can also take into account the amount you could borrow against your credit limits, so it’s best to close down unused accounts and limit the number of new applications you make.
9. You only have one credit score
Each lender uses a unique method to calculate credit scores and some use a different formula for different products, such as loans and cards. So you could get three different credit scores if you made three applications in a single day. Your credit history and score also change as your circumstances change. For example, missing a few repayments could lower your score, while paying off a debt could give it a boost.
10. Items in your credit history stay on file forever
Your credit report is designed to give lenders a good picture of your recent and current position – they’re not interested in seeing that a 40-year-old missed a few repayments when he was 21, because it has no relevance to his likely behaviour today. Most information about your credit history is therefore held for between three and six years.
Check your Experian credit report online with a free trial of CreditExpert, the UK’s leading online credit monitoring and ID fraud protection service.
Your thoughts, experiences and comments are welcome. You can join the discussion below and leave your thoughts and experiences.
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On point 8. above, regarding closing down unused cards, I would add that maintaining some credit cards is important, its best to clear it at the end of the month but if you remove all your credit they have nothing to judge you on. So keep a couple of cards but clear them each month, that shows you are potentially a good risk.
I’d personally keep the hardest ones to get from the most prestigious and tight lenders!
Wow what a great tips, thank you for spending your time to post this kind of articles. I hope a lot can read your post as I am sure it is very helpful, I
I think debt management companies are in for a shock because I am hearing rumblings that the government is looking at introducing regulation for those guys as well and in my opinion, it’s about time to!
Interesting point of view. Again, good stuff here.
If you have never borrowed you will get the best deals – this is awesome but will it be possible? Credit management by proper repayment would be wonderful in getting future finances easily. As usual good stuff out here. I love your article and glued to your website. interesting read and very informative.