Consumer credit history can be a complex area to understand. There are some myths that surface regarding how financial institutions calculate your personal credit score. Here we look at some of the most common misconceptions and dispel the rumours.
It is often believed that the credit history of those who lived at your address before you can have an effect on your score. This isn’t true, and there is no link with past occupants unless you are financially connected in some way: this would be through a joint loan or account. When you are applying for homeowner loans or other forms of credit, the lender will ask for previous addresses to assess your stability. Family and friends who currently live with you but are not financially linked will also not have an impact on your credit score. If you have some form of joint account with them, then their history can also be checked even if you’re making a new individual application.
Your credit history is stored and compiled by credit reference agencies, but they are not in charge of making any of the decisions regarding your credit-worthiness. The lenders will assess this data to help them make a judgement on your application for secured loans, credit cards or other financial products.
Any form of credit that you have had in the past, including homeowner loans, will be examined when you make further applications. Lenders will look at any past debt problems that are still on your file, including missed payments. Any time you fail to make a payment on time, receive a County Court Judgement (CCJ), enter into an Individual Voluntary Agreement (IVA) or are declared bankrupt, the information will remain on your file for a minimum of six years.
You might think that you’re a good risk for potential lenders if you’ve never taken out any form of debt before. However, if you then apply for secured loans, you could find you’re rejected or put on a higher interest rate. This is because lenders have no history to assess, so they can’t see how reliable a borrower you’re going to be. Having a small amount of credit and managing it correctly is one of the best ways of building up your credit score.
There is often mention of a credit blacklist that lenders look at when deciding whether to accept an application. However, this is a complete myth, and there is no list in existence that details bad debtors. When you apply for credit, your full history will be examined, and the lender will make a decision on an individual basis. Each financial institution has its own specific criteria that they use to determine whether to accept you and the limits that they might put in place.
People often believe that they shouldn’t pay off the full amount on credit cards as it could damage their credit score. This isn’t correct and, in fact, the opposite is actually true. If you use your credit cards and then clear them at the end of the month, it shows that you can afford credit and are less likely to miss a repayment.
If you have large numbers of credit accounts, even if some of them are dormant, it could be detrimental to your credit score. It shows lenders that you have access to a potentially large amount of credit, which could cause problems in making repayments if you chose to use it all. Lenders like borrowers to live within their means, so try not to have card balances that are over 25% of the total limit.
There are different criteria for each lender and product, so no one will have a single credit score. Lenders will look at the time of your application to assess your credit score, as small changes could have an impact either way.