Credit Scores – Knowledge Is Power
Credit scores rarely come up in everyday conversation – people just don’t talk about them. But why don’t we? Credit ratings can dictate how your financial life plays out; a poor credit score may be all that stands between you and your dream home, or that car you so desperately want. If people were happier to talk about it and spread the knowledge, then perhaps we’d all understand them a bit better. Unfortunately, due to misinformation and this apparent lack of communication, there are a number of common misconceptions out there;
‘I don’t have any credit cards or loans. My credit score is fine.’ You would think that by avoiding any credit problems, you would automatically be given a higher score, but in reality, if you don’t demonstrate that you’re able to manage repayments, you could still be a potential financial nightmare. Remember; the credit companies don’t know you, and regrettably in this case, you are guilty until proven innocent. Utilising a credit card to demonstrate that you’re a responsible borrower is a great way to solve this issue – by using it for occasional purchases and making sure that you pay the balance off before interest is charged, your rating should start looking a lot more positive.
‘I’ve got a bad credit score. I’ll never be able to borrow money.’ A bad credit score can be improved, but you need to allow up to a year for these improvements to show. As before, you will need to manage some small bits of credit over a sustained period of time so that your score is able to rise. Although, if your credit history is bad, this can be easier said than done. If you’re unable to qualify for certain types of credit then a small guarantor loan may be an option – a close friend or family member with a good credit score can back up your loan application and they won’t need to do anything unless you stop paying. By managing monthly payments on a loan like this you are improving your credit history and getting one foot in the door. By keeping up payments your credit score will benefit in the long run.
‘I was an irresponsible borrower in my youth; I’ll never be approved for a loan now.’
If you are worried about a few missed payments from years ago, don’t fret. Most information held on your credit history is only there for between three and six years. As long as you have been demonstrating an ability to pay off debts regularly and on time then your score should reflect exactly what lenders want to see.
‘The previous owner of my house went bankrupt, now my credit score will go down.’ Credit reference agencies no longer list addresses with bad scores – credit ratings are tied to individuals, not locations. The only time another person’s credit score will affect your own is if they are listed as having a financial relationship with you. For example, if you are living with a partner and paying bills with a joint account, any issues arising from this will affect both of your credit scores. Your partner’s credit score may also be checked if you apply for credit as an individual – this is why it’s important to declare any change in circumstances, (say, if you break up) so that you aren’t penalised for another’s actions.
‘If I keep applying for credit then it will show that I’m financially active.’ When applying for credit, less is more – especially if you’re being turned down. If a lender refuses an application from you then this counts as a black mark on your credit profile, which can lower your score. Only apply for credit once you’re sure you fit the criteria of whom the company are willing to lend to (for example, if you are certain your credit history is bad, apply with a bad credit lender). Additionally, having too many repayments on your plate can put off loan companies, as they want to be sure that you are able to afford their repayments. Affordability is a big part of “responsible lending”.
Before applying for any type of credit it is advisable to research how it can affect your credit rating if you’re refused. You can check your score at www.creditexpert.co.uk where they offer a free 30-day trial period (if you don’t wish to pay monthly after the 30 days, make sure you cancel before the free trial ends). Knowing where you stand is useful whatever your future financial plans. Remember – knowledge is power; use it to your advantage.
This article was written by Coral Pearce-Mariner on behalf of https://www.