Debunking myths about credit scores and credit reports

Representative Example

Total amount of credit £80, duration of the agreement 29 days, rate of interest 292% per annum (fixed), total amount payable (in one repayment) £98.56. Representative 1281.8% APR.

There are a vast number of myths that exist on the subject of credit scores and reports that can be harmful for those trying to improve their overall credit rating. By debunking these myths, we can reduce the amount of false information that could otherwise be detrimental to your ability to secure an online loan.

This article aims to debunk some of the most common myths about credit scores and reports.

"Someone that has never borrowed will have an excellent credit score"

Credit ratings are determined by your ability to repay debts on a consistent basis. As a result, it is difficult for a Credit Reference Agency (CRA) or credit provider to assess your potential ability to repay a loan if you have no borrowing and repayment history. This may therefore negatively impact your credit score. Finding a way to balance manageable debt repayments is critical to building a good credit score by demonstrating your credibility to Credit Reference Agencies and thus potential lenders.

Man stepping on a banana

"A poor credit score is permanent"

A poor credit score is permanent - this is certainly not true. A poor credit rating is ultimately the result of consistently missed debt repayments, be them for credit cards, loans, mortgages or bills. Your overall rating is therefore based on how your circumstances develop over time, including (but not limited to) your repayment history. If you continue to make repayments on time, then your credit score should improve as you do so.

As you are now well aware, different Credit Reference Agencies evaluate your score using different parameters. There are simple steps that you can take to improve your score across agencies, for instance ensuring all of your personal information is up to date and being registered to vote.

Another common method of improving your credit score is to use a credit card with a small credit limit and pay the full balance every month, thus demonstrating your commitment to repaying your debt on a consistent basis.

"Checking your credit score from time to time will adversely affect your score"

It is commonly heard that checking your credit score regularly has a negative impact on your score. This is of course false. In fact, it is advisable to monitor your credit score regularly to track your progress and improvement.

When an employer or landlord assesses your credit score to pre-approve any application, your credit score remains unaffected. Applying for larger amounts of credit may impact your score, so be aware of this when applying for certain loans. It is also worth asking creditors about the potential impact of their credit rating checks on your score.

"Once a late or missed credit amount has been paid off it will not show up on your credit report"

Missed and late repayments, particularly for larger debts like mortgages and bills, will stay on your credit report for a minimum period of six years. Although it will appear on your credit file, there will be a note to highlight "balance paid in full" or "balance partially settled" regardless of whether or not it has been paid late.

"The credit reports and credit scores from the three key CRAs will be the same"

Each of the three main Credit Reference Agencies utilise different models and systems to determine their own respective credit ratings. Moreover, each will upload and update your personal information and/or financial history at different times. Therefore, some information will appear on your credit report with one agency and not another. Also, not all creditors will use reports from all of the Credit Reference Agencies.

Here are some other myths that should be debunked:

This can only be true if you have a joint account with someone or a shared loan history with a family member or friend, but ultimately you are assessed by a Credit Reference Agency individually. Even if a family member has been through insolvency or bankruptcy this should have no bearing whatsoever on your own credit score.

Missing a few repayments over a six-month period can have a seriously adverse effect on your credit rating, particularly for longer-term debts like mortgages or utility bills. Prioritising making any outstanding payments on time whilst reducing balances should ensure that your credit score does not deteriorate quickly.

Wealth doesn't determine your credit rating. As previously mentioned, your credit score is based on your personal information and repayment history, so the amount of money you have is actually irrelevant - how you've managed your debt repayments is the key factor in calculating your overall credit score.

These are some of the most common myths and rumours circulated in relation to credit scoring and reporting. This isn't a comprehensive list - more information can be found and reviewed online. Taking control of your credit score early can have a real positive impact on your ability to lend in the future as well as your overall financial health and stability.