Know the score over credit checks
TRICIA PHILLIPS looks at the 10 main things you need to understand about how credit-ratings work
LONDONERS are the most likely to check their credit score to help them find the cheapest deals from credit cards to utility bills, while people in Plymouth are the least likely to do it, according to research.
A study by credit firm Experian revealed that although the number of people knowing their credit score has risen from 22% to 26% over the last year, there are still many misunderstandings over what does and doesn’t affect it.
We teamed up with Experian to debunk the top 10 credit score myths...
PREVIOUS OCCUPANTS AT YOUR ADDRESS AFFECT YOUR CREDIT SCORE
FALSE: It makes no difference if the previous occupant of your home was a millionaire or bankrupt. It won’t affect your score. You only become financially connected to someone else if you have credit together, like a joint bank account.
LENDING DECISIONS ARE MADE BY CREDIT REFERENCE AGENCIES
FALSE: Credit reference agencies simply compile and hold reports and make these available to lenders, with your permission, when you apply for credit.
Lenders use reports to help them decide if they should approve applications.
PAST DEBTS AND MISSED PAYMENTS AFFECT SCORES
TRUE: Court judgments for non-payment of debt (such as a county court judgment or decree) and personal insolvencies (such as bankruptcy or sequestration) stay on a credit report for at least six years.
Missed repayments on credit cards are also recorded for at least six years. Any of these will damage scores, but the impact diminishes the older they get.
IF YOU’VE NEVER BEEN A BORROWER, YOU’LL GET THE BEST DEALS
FALSE: A credit history is a record of how you handle your finances. If you’ve never borrowed, lenders will struggle to predict how reliable you’ll be at repaying credit.
Lenders like reports showing a few well-managed loans or cards – and regular repayments.
One way to improve a lower score is using a ‘credit builder’ style credit card for occasional purchases and repaying it in full each month.
Tools to check eligibility, such as on experian.co.uk, can help you find cards you’re likely to be accepted for.
YOU ONLY HAVE ONE CREDIT SCORE
FALSE: Each lender uses a unique method to calculate your credit score based on their experience with customers and their lending policies. Some use a different formula to calculate scores for different products.
Your Experian Credit Score, for example, is something only you can see and is designed to indicate how a typical lender may view your credit history.
CREDIT BLACKLISTS EXIST
FALSE: They don’t. Credit reports are factual, and most information credit reference agencies hold is actually positive. Even if yours includes past missed payments or other negative information, you’ll usually still find a lender willing to take you on – although at a higher rate because of the perceived higher risk.
FRIENDS AND FAMILY LIVING IN YOUR HOME AFFECT YOUR CREDIT RATING
FALSE: Unless you share a financial connection with them – for example, a joint mortgage – they have no impact on your credit report or score.
IT DOESN’T MATTER HOW MANY CREDIT ACCOUNTS YOU HAVE
FALSE: Lenders like to see a proven track record of good financial management. It helps if your report includes a mix of well-managed accounts, both active and paid up. Keep an eye on balances though – don’t borrow up to the limit on several cards.
ITEMS STAY ON CREDIT REPORTS FOREVER
FALSE: Reports are designed to give lenders a picture of your recent and current financial position. They not interested in missed payments from over a decade ago. Most financial information is held for around six years.
CHECKING YOUR CREDIT REPORT LOWERS YOUR CREDIT SCORE
FALSE: You can check as often as you like. Only when lenders check to assess a credit application is a ‘hard’ footprint recorded that can affect your future score. That’s why it’s sensible to limit and space out applications. These don’t show the decision – just that you applied – and are removed after one year.