The media today is filled with news about your credit score, and how important it is to have good credit. For most people, though, the amount of information about credit scores is overwhelming, and many choose to simply ignore it as if it does not matter. Actually, the opposite is true; a credit score is very important to what financial options you have. In this article we hope to provide more information about credit scores for the average consumer, as well as debunk some of the popular misconceptions people have about credit scores.
What Exactly is a Credit Score?
A credit score is a numerical value that shows lenders your financial and/or credit history. There are actually three agencies which gather your financial information and calculate a score; they are Experian, Equifax, and CallCredit. Since these three entities use different scoring criterion, your scores will be slightly different amongst them. Lenders will usually look at all three scores in order to have a comprehensive look at your financial history, and will base their decision in part on these scores.
What Types of Things Show up on my Credit Reports?
The three above mentioned credit reporting companies will gather together different types of information to get an overall view of your financial history. The information comes from banks or other financial institutions, mobile phone companies, the Electoral Role, and other places that carry some type of financial information. Some of the things that show up on your credit report are:
- Your name and place of residence
- Whether or not you are registered to vote at your address
- The amount of debt you have or the amount of money you owe to lenders
- Information from joint banking accounts or mortgages
- Late or missed payments
- Judgements against you
- Whether you have had a home or vehicle repossessed
- If you have moved out of a home while still owing money on it
- Whether you have ever declared bankruptcy or, in Scotland, entered into a Trust Deed or Individual Voluntary Arrangement (IVA)
How long these items stay on your credit report varies depending on what it is. However, none of them will remain part of your credit history forever.
As we pointed out earlier, there are many commonly held misconceptions when it comes to credit reports and credit scores. We have compiled a list of the most common in the hopes that it will help you feel less intimidated and overwhelmed regarding credit scoring.
Myth #1: Previous occupants or owners of your residence can affect your credit score.
This is not true at all, as any information that is on your credit report has to do with you personally. Your address has nothing to do with your credit score in any way. The only people who can impact your score besides yourself are those with whom you have a joint account or loan.
Myth #2: Credit reporting agencies make lending decisions.
Credit reporting agencies like Experian, CallCredit, or Equifax do not make any decisions about whether or not to lend you money. They simply provide a picture of your financial history to the lender. It is up to the individual lender to make the decision about whether to extend credit to you.
Myth #3: Debts from the past are no longer relevant.
This is one of the most commonly held misconceptions, and is definitely one of the most harmful. Past debts can stay on your credit report for several years. Missed payments can be seen on your credit report for three years, while other more serious financial issues can remain in place for six years. These include county judgments against you, bankruptcy, or IVA’s.
Myth #4: First-time borrowers get better interest rates or special deals.
While no debt is definitely a positive on your credit report, no credit at all is a problem. Lenders cannot view your financial history if you have never been extended credit, and are therefore reluctant to approve a loan. The best credit reports are those that contain some type of credit card that has been managed well, or a small loan that has been paid as agreed.
Myth # 5: Credit reporting agencies can blacklist you.
There is no blacklist when it comes to credit. The only thing that can have an impact on whether you are extended credit is your past financial history. Lenders cannot discriminate against a person in any way, and your religion, race or gender is not factored into the equation.
Myth #6: Paying for items in full will negatively impact your credit.
Although some lenders impose a penalty for early payoff, it does not affect your credit in any negative way. It could increase your credit score, but will not cause it to decrease.
Myth #7: The number of open credit accounts is irrelevant.
In addition to looking for things like on-time payments and debt-to-income ratio, lenders also view your credit history to make sure you can afford to pay for everything you have open. If you have large numbers of credit accounts, you could conceivably max out the cards and be unable to afford to make all of the payments. It is best to have only a few credit cards with excellent payment history.
Myth #8: You have only one credit score.
As we discussed earlier, there are three major reporting agencies and all three of them score you differently. Therefore, you have three separate credit scores. The lender will look at the three scores to get an aggregate picture of your financial history before extending credit to you.
Myth #9: Negative financial information will stay on your credit report forever.
As we discussed earlier, negative marks on your credit report stay on for a limited period of time. Bankruptcies, CCJ’s, or IVA/Trust Deeds will remain on your credit report for six years, while any payments you have missed will stay on for three.
What if I am refused Credit?
There could be a variety of reasons why you are refused credit, so the first thing to do is take a look at all three of your credit reports. You may have late or missed payments from your past that are still on your credit reports, or the lender you are going through may feel like extending you more credit would be difficult for you to pay back. In addition, some lenders deal with certain customer types, and you may not meet their criteria. The reason for your denial could be something as simple as missing or incorrect information on your credit application.
Once you have received copies of your credit reports, make sure that all of the information held on them is accurate. Also, double check your credit application to make sure your information is correct. If you find that you have made mistakes, correct them and resubmit the application. If the lender specializes in certain customers, you may need to find a different lender.
How Can I Obtain Credit in the Future?
Barring any misinformation that might be on your credit reports, the best way of improving your chances of being granted credit is to manage your finances scrupulously. We have created a list of ways to improve your credit.
- Make sure all of your payments are made on time. Even if you can only pay the minimum amount due, you will still be credited as paying on time. This alone can make an improvement in your scores.
- Review your credit reports at least annually. In this way, you can be sure that any mistakes on your reports can be corrected immediately.
- Create a strict budget and stick to it; make sure you are not spending unnecessarily and also comparison shop. In this way, you can make sure you are getting the best value possible for your money.
- Use the Financial Health Check at www.moneyadviceservice.org.uk
- If you hold a joint account with a spouse or anyone else, be sure they do not have any financial issues that could be causing problems for you. Also, make sure they also regularly monitor their credit files, as their credit will impact yours.
- If you have any unused credit accounts, close them.
- Make sure your personal identification remains private. If criminals gain access to it, they can take credit out in your name and cause many problems for you.
- Make sure you are a registered voter at your current address.
What Can I do if I am Concerned About my Financial Status?
One of the first things to do if you are having financial issues is to open up a dialogue with your lender and/or creditors. Do not let fear or embarrassment prevent you from taking steps to improve your financial condition. Often, lenders or creditors are willing to help make payment arrangements that you can afford in an effort to help you learn to live within your means. The last thing you should consider is taking out a debt-consolidation loan. Often the interest rates will be higher and you will find yourself in even worse debt. For additional help with financial issues, you can visit either StepChange or Citizens Advice Bureau. They both offer helpful tools to help you manage your finances.
How Important is Checking My Credit?
One of the main reasons for periodically checking your credit reports is to make sure that you have not been a victim of identity theft. Since it is one of the fastest growing crimes in the world, you want to make sure that everything listed on your credit reports is actually yours. If you monitor your credit reports closely and make sure to check them semi-annually or annually, you can become aware of fraud early enough to prevent it from causing a major financial catastrophe.
It is also important to make sure that all of your information is up to date and accurate. If it is not, you could be rejected for credit when you really shouldn’t be.
You can obtain copies of your credit reports by visiting the websites of all three major credit reporting agencies. Equifax, CallCredit, and Experian all three offer a free trial in order to gain access to your credit information. As long as you remember to cancel the membership prior to being billed for it, you will be in good shape.
Just remember that the best way to make sure you can be extended credit when you need it is to manage your money well and make sure you are not overextending yourself when you do apply for credit. It can have a long-term negative effect on your future.
Protect yourself from identity theft with ID Theft Protection, available from Lifesure on 01480 402460.
