Credit Rating Myths

If you’re like most of us, you understand the need for a good credit rating in today’s computerized society. However, you may not fully understand what a credit rating is and how it affects your ability to borrow.

30% of us have been refused a loan at some point and 40% of those don’t know why ... so they guess and draw their own conclusions, which may be misinformed.

So, here’s a quick guide to dispel some of those credit rating myths that may be causing you to be concerned unnecessarily about your credit rating.

Myth 1: Other people living at my address affect my credit rating

In the past, lenders did check the credit reports of others living at your address ... and take that into account when looking at your ability to borrow.

That’s no longer the case ... unless you share a bank account. Instead, your credit report contains a section listing your financial associates - people with whom you share a joint account, such as a joint mortgage.

Lenders do look at the credit reports of these people when assessing your credit status ... and if their credit is poor it could influence their decision.

Before applying for any loan, it’s a good idea to check your credit rating and that of any people you are linked with financially ... before making the new application ... as lots of failed applications to different lenders is another factor the negatively affects your score.

Myth 2: Previous occupants at my address affect my credit rating

Previous occupants of your current address do not affect your credit rating.

Lenders are concerned about your ability to repay any loan they may agree to give you, so they look at your own personal circumstances. If you’ve recently moved, they want to know your previous addresses, typically for the past three years. Again, whoever lives at your previous address doesn’t affect your credit rating.

Lenders to like to know you actually live at your current address and it helps them feel more comfortable if you are on the voting register at that address ... so it’s useful if you register to vote where you live.

Myth 3: My past debts don’t count

One of the main purposes of your credit rating is for lenders to establish how you have handled any previous loans, credit cards and other financial liabilities. So you how you dealt with past debts does count.

Missed payments stay on your credit report for 36 months and county court judgements (CCJ’s) stay on your report for 6 years, as does a discharged bankruptcy record.

If lenders see that you have a history of not meeting your obligations, they do see this negatively. However, every lender uses a slightly different equation to calculate a credit score - some also use different versions for different types of loans.

If your credit score is poor, some will not lend to you at all. Others will lend, but you’re likely to be offered less attractive borrowing terms than if you had a good credit score.

The positive news is that your credit rating changes when your circumstances change. By taking on a new loan, and religiously paying it off on time, you begin to improve your credit score and help your ability to get credit again in the future.

Another point worth noting ... if you have a bad credit rating due to unusual circumstances, such as illness or an accident ... you may be able to take remedial action by adding an explanation of those circumstances to your credit report. Lenders will see this and may take it into account.

Myth 4: I can’t get credit because I’m on a blacklist

Fortunately, this is also untrue - there is no such thing as a credit blacklist.

What is important to lenders is your history of credit and how you handled it. In fact, never having had any credit can be a negative factor, as lenders have no reference to assess your creditworthiness.

Every lender uses a slightly different equation to calculate your credit score - some also use different methods for different types of loans. So your credit rating will differ, depending on which lender you apply to, what type of loan you want and your current circumstances.

Myth 5: Credit reference agencies decide my credit rating

Again - not true. Credit reference agencies simply collect information supplied to them by banks and other lenders and institutions relating to any borrowings you have with them, either now or in the past.

This information is updated regularly and then accessed whenever you apply for any kind of credit agreement for a new lender to see how you have handled previous commitments.

Lenders then use the information to calculate your score ... according to their own individual criteria.

Generally, the higher your score, the lower the risk you represent and the easier you’ll find it to get a good deal.