4 Common Credit Score Misunderstandings

September 11, 2022

If you are thinking about applying for a loan or a mortgage, you have probably been advised to check up on your credit score.  Your credit record is important, because it is used by lenders to assess your likelihood of being able to meet loan repayments, based on past performance.

A lender might refuse to offer credit to someone with a history of poor financial management, because it represents too much of a risk for them. While this is true, there are a lot of myths and misunderstandings about the way credit records are used. Here are some common misconceptions.

If you have a good income, your credit score will be good

There is no relation between your income and your credit score. Credit reference agencies (CRAs) do not take into account your earnings or savings, or any benefits that you receive. However, lenders will want to look at your income and savings, to work out how much they are prepared to let you borrow, on the basis of your ability to meet repayments.

If you don’t use credit cards, you will have a better credit score

This is not true. Some lenders may even view a well-managed credit card as a positive indicator, because it provides evidence that you can meet regular loan repayments on time. However, if you frequently fail to repay your credit balance in full each month, or default on payments, this will damage your credit score.

You have one single credit score

The UK has three major CRAs, which are Experian, Equifax, and TransUnion. They do not use a standard criterion to work out your score, and your ratings can change over time. Therefore, you should always cross check the major CRAs, because sometimes a simple spelling error, or other incorrect information, can make a big difference to your score.

Credit scores carry information about medical and criminal records

CRAs are not allowed to collect or hold any personal data that is not directly related to your finances. They do not collect information about your medical history, or criminal record. However, if you have been the subject of a County Court Judgement (CCJ), this will appear on your credit report.

A CCJ may occur if someone has taken court action against you because of failure to repay a debt. A CCJ will remain on your credit score for six years. However, it is not an automatic barrier to getting a loan or mortgage deal. There are specialist lenders who will consider non-standard cases.

They will look at your financial situation as a whole, rather than one particular aspect of it. In the case of an adverse event such as a CCJ or bankruptcy, they will look at how long ago it occurred, how much money was involved, and if you repaid the debt.

If you are looking for IVA mortgage brokers, please get in touch today.

Your home may be repossessed if you do not keep up with your mortgage repayments.

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