6 Myths About Credit Scores

6 myths about credit scores

How do credit scores work? It's a question people think they know the answer to, and we've heard all the most common - and just wrong - repliles. Here are six of the most common.

1. There's a secret blacklist

There is no such thing as a blacklist. It is a fallacy which has been around for many years but rest assured there is no truth in it. Banks and credit card companies do not have a list of people they won't lend money to. Instead, lending decisions are made on the basis of your credit score along with other information in your credit file.

2. Clearing your credit card helps your rating

It may seem weird, but paying off your credit card balance in full every month may not improve your chances of getting a loan.

While it will increase your credit score, banks may reject your application because their ideal customers are those who are always in debt but who always make the minimum payment very month. Not those who completely clear their financial products every month. It can be beneficial to leave a small balance on your credit cards.

3. Council tax arrears will affect your credit score

Not paying your council tax can lead to all sorts of problems, but it won't affect your credit score. Local councils do not pass data, either good or bad, to the credit reference agencies.

4. We have one credit score

Nope. There are three main credit reference agencies, the best known of which is Experian. Each applies different criteria so calculate your credit score differently. It is, for this reason that your credit file is so important, because it contains other information on which lenders will base their decision.

In essence each lender will calculate their own score or rating to determine whether they extend you credit or not. They will base this on the information contained in your application along with the credit score and other data supplied by one or more of the credit reference agencies.

5. All you need is a decent score

Sorry, but unfortunately there's more to it than that. A good credit score is massively important and you should do everything in your power to increase it. But lenders don't make their decisions juar on your score.

They take many more factors into consideration, some of which they will only know from your application form, including salary. It is also worth noting that your credit score will differ between each credit reference agency.

6. What your credit score doesn't include

If you're worried that banks are all-seeing, all-knowing organisations then - despite conspiracy theorists who say they are - don't worry; they aren't. Your credit file does NOT include several types of information including:

• Council tax arrears

• Spouse credit arrears (unless joint accounts)

• Being previously rejected for credit

• Defaults older than six years

• Bank charges

• Salary

• Balances from savings accounts

Of course, lenders will look at more than just your credit score. They will work out how much of a risk they think you are and then assess how much they will charge you for their product. Those they deem more of a risk will pay a higher rate of interest, for example.

The importance of your credit score

These myths aside, your credit score is hugely important and has such a bearing on whether you will be able to access credit.

Don't think of your credit score simply in relation to loans and mortgages. It is used to determine applications for credit cards, mobile phone contracts, utility services, and insurance amongst many other things. Including, of course, by landlords when assessing tenants for their properties.

Work hard to ensure your credit score is as high as it could be by reading our article 5 tips to improve your credit score and take a look at how to check your credit score for more useful information.

RELATED ARTICLES

A third of tenants have no idea how to influence their credit score

If you're one of them then here's our handy guide to the world of credit scores and how to improve them.

Credit building through rent

Recent research shows how many tenants don't realise their rental payment record can count towards their credit score. Here's why it really matters.

Six reasons why tenants get a raw deal

Here's why many tenants feel that everything is stacked against them just because they choose to, or have to, rent their home.