How do credit scores work? It's a question people think they know the answer to but, when asked, often get wrong.
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.
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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. 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
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 mortgage. 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.
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CreditLadder can help you improve your credit score
If you want to improve your credit position by reporting your rent payments, CreditLadder is the only way to improve your credit score and position across all four of the main Credit Reference Agencies in the UK, namely Experian, Equifax, TransUnion and Crediva. Building up a high credit score has a lot of benefits, including helping you access finance at better rates - this can also help save you money.
CreditLadder also runs a free mortgage application service in partnership with Tembo which will tell you how much you could borrow.
Remember the information provided in this article is for information purposes only and should not be considered as advice.
