10 myths about credit reports
Since the onset of the credit crunch, we are more aware than ever before of the importance of ensuring our credit record is not only accurate but also as ‘good’ as possible.
When you apply to take out a financial product (such as a credit card, loan, mortgage or even a current account), your credit history will be checked by the provider to confirm the information you have told it and to give you a credit score. If you don’t match its criteria, it will reject your application. At the very least, it may use your score to decide how much interest to charge you.
Lenders aren’t the type of company that may search your credit record – when you sign up to a contract, for a mobile phone or gym membership for example, you may be subject to a credit search. In addition, landlords will often check the records of prospective tenants to make sure they are responsible and will pay the rent. Just remember, though, that firms must get your permission before they run a credit search on you.
Your credit report contains information about you from the electoral role, any financial links you might have (a joint mortgage, for example) and whether you have any County Court judgments, bankruptcy orders or individual voluntary arrangements.
Most importantly, your record includes all your credit agreements from the past six years – including how you have managed your repayments and the amount of credit you have available to you.
It’s good practice for people to check their credit records on a regular basis to make sure all the information is correct and to ensure they haven’t fallen victim to identity theft.
However, many people are deterred from requesting to see this information because they think this will leave a ‘footprint’ on their report and will have a detrimental affect on their ability to get credit in the future.
This is just one of many ‘myths’ surrounding credit reports:
1. Checking my credit report will be expensive
A quick internet search will reveal dozens of companies that offer people their credit report, but the three most popular credit agencies are Experian, Equifax and CallCredit. By law all credit agencies are required to provide you with a one-off copy of your credit report for £2. However, you can also purchase additional products that allow you unlimited viewings of your rating online.
2. Checking my report will damage my chances of being approved for credit
Checking your credit report will not leave a footprint or reduce you chances of being approved for credit down the line. You can check your record as often as you like and even request your report from more than one agency.
3. Other people who live or used to live at my address have damaged my credit rating
Your credit report only contains information about you. While your address (and your previous addresses from the previous six years) will be included in the public information about you, the credit history of previous or other current residents won’t impact your score.
However, if you share a financial product with another person then their score could impact your rating.
4. I’m on a credit blacklist
There is no such thing as a credit blacklist of certain postcodes. Lenders will look at you and your own history when deciding to lend to you. They will not consider factors such as your race, religion, political persuasion or gender.
A quick tip to improve your score, however, is to make sure you are on the electoral register at your current address. If you are not, then lenders are likely to be reluctant to lend to you.
5. Only financial products are included on my record
Most people assume that only credit cards, loans and mortgages are included on their credit rating. In fact, if you miss a mobile phone payment or forget to pay a utility bill, this will also be noted on your record and could impact your ability to borrow in the future.
6. Being turned down for credit will show up on my record
When a firm searches your credit record, it leaves a ‘hard footprint’ that can be seen by other lenders. However, if you are rejected for a loan, for example, this won’t be recorded on your file.
On the other hand, making numerous applications for credit within a short space of time can adversely affect your credit rating.
7. A missed credit card payment from a few years ago has damaged my rating
Your credit report contains all your credit agreements from the past six years, and includes how you have managed your repayments. For example, a 0 indicates that your payments are up to date while a 4 shows payments are four months late. The letter D indicates the account is not being used while a U is displayed when a credit agreement is new and the information is not yet available.
If an account has been settled and you made all the repayments on time, then this will be recorded. But if an account was in default because a payment was late then the date this happened and the amount outstanding will be included.
While missing a payment will be recorded on your file and could affect your overall credit score, it’s worth remembering that lenders will put more prominence on more recent activity. If you have been completely up to date with all your credit agreements, but once missed a payment, this will not necessarily ruin your chances of getting credit in the future.
You can also include a statement on your report where you can explain why you missed a payment. Although lenders don't have to take this into account, it at least gives you the chance to tell your side of the story.
8. I’ve never borrowed so my credit record is squeaky clean
You might think that if you have never had a credit card, or any other type of loan, then your credit record will be squeaky clean – making you the perfect candidate for lenders.
However, a quirk of lenders is that they are more confident in lending to people who have a history of borrowing and repaying debt on time.
If you have never had a credit agreement then taking one out and repaying it in full and on time will improve your rating. Most store card providers don’t carry out credit checks, so this is an ideal place to start. Just make sure you pay off the balance in full and on time.
9. I’ve paid off all my debt so having credit cards won’t impact my rating
When lenders consider you for a loan, they will pay particular attention to the amount of credit you have at your disposal – even if you aren’t currently using this.
Having several dormant credit cards might cause concern, as it suggests the potential for you to run up great piles of debt. It’s therefore worth cancelling some or all of your credit card agreements once you no longer need these cards.
10. It’s impossible to improve my rating
Many people assume that once they have missed a payment, or taken on too much debt, then their credit record is damaged and there is nothing they can do about it. But in fact, there are steps you can take to improve your record and overall credit score.
As well as making sure you make all your payments, you should focus on trying to pay off some of your debt. For example, rather than just making the minimum repayment on your credit card each month, try to clear as much as you can afford – or, even better, pay off the entire balance.
Not only will this save you money as you won’t face interest payments, but you will also reduce your overall amount of indebtedness. As per point nine, however, you should also consider cancelling unneeded credit card agreements.
You should also check your credit report for mistakes or suspicious footprints or credit agreements you weren’t aware you had. If you spot a mistake or suspicious activity then contact the agency that sold it to you. It will be able to investigate the matter and find out whether you have been the victim of ID theft or a bank’s mistake.
If you have been turned down for a loan or other credit agreement then you have the right to know why. Ask the lender for details of your application as this may highlight any mistakes or issues with your report.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
Your credit score is a three-digit number (ranging from a low of 300 to a high of 850) calculated from the information in your credit report. Your credit score enables lenders to determine how much of a credit risk you are. Basically, a low credit score indicates you present a higher risk of defaulting on your debt obligations than someone with a high score. If you have a low credit score, any products you successfully apply for will carry a higher rate of interest commensurate with this risk.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
A person (or business) unable to pay the debts it owes creditors can either volunteer or be forced into bankruptcy – a legal proceeding where an insolvent person can be relieved of their financial obligations – but loses control over their bank accounts. Bankruptcy is not a soft option. Although it may wipe the financial slate clean, it is extremely harmful to a person’s credit rating (it will stay on your credit record for six years) and will adversely affect your future dealings with financial institutions. Bankruptcy costs £600 paid upfront.
A report containing detailed information on a person’s credit history, a record of an individual’s (or company’s) past borrowing and repaying, including information about late payments and bankruptcy. It also includes all applications a person has made for financial products and whether they were rejected or accepted. Your credit report can be obtained by prospective lenders to determine your creditworthiness.