Brits baffled by credit ratings
Wednesday, 10 January 2007 12:00
The majority of Britons are seriously mistaken when it comes to working out what affects their credit ratings.
Everyone in the UK has a credit score, held by credit reference agencies, that details how good they are at paying back loans and credit cards, along with more general information.
But the factors that lead to this picture being built up are massively misunderstood by millions of Britons.
Some 71 per cent of UK adults think the previous resident of their home can affect their credit rating, 63 per cent think family and friends can harm the credit rating of people they live with even if you do not share a joint account and 53 per cent believe credit reference agencies decide people's credit ratings and make lending decisions, research from Creditexpert.co.uk reveals.
None of these things are true.
Whenever anyone applies for a new credit card, loan, mortgage or any other financial product, the company generally runs a credit check on the applicant to see if they are trustworthy enough to loan money to.
Having a poor credit score does not necessarily mean a loan will be refused, but it may well mean the lender charges a higher rate of interest as it sees a higher risk that the loan might be defaulted on.
However, understanding how a credit score is created is far from a simple process, and misunderstanding it can leave people at risk of being refused anything from a new current account to a mobile phone contract.
And misunderstandings influence the lives of UK residents every day - 33 per cent of Britons have been refused a loan at some stage with two in five of these not knowing why.
And to try and clear things up, Creditexpert has given a brief breakdown of the major influences on credit ratings.
- Past debts: Evidence of missed repayments stays on your credit report for 36 months and is used by lenders to see how well you manage your existing credit commitments. Details of court judgments or bankruptcies or defaulted accounts stay for six years. If you were judged to be a 'reckless' bankrupt, the details of a Bankruptcy Restrictions Order could be there for as long as 15 years.
- Identity fraud: Protect your identity - your credit rating can be adversely affected by a fraudster even though you are not at fault and sometimes without your knowledge.
- Credit ratings of 'financial associates': Your credit report does not contain any financial information about anyone else, but it does list the names of anybody with whom you have a joint account. If they have a poor credit record, your application could be refused, so it is important to update your credit report if you no longer have joint finances with an ex-partner.
- Multiple loan or credit applications: When looking for the best credit deal, ask for a quote before making a formal application for credit - as every credit check, or 'search' is recorded on your credit report. If you make too many applications, lenders may think you are desperate for money, over-extended or even identity fraud is taking place. Some lenders can do a quotation search instead of a full credit search - ask them if this is possible if you are only shopping around.
- Bankruptcy: If you are made bankrupt, this will show on your credit report for at least six years. Your report may also separately show details of any debts that were included in your bankruptcy. These will also stay on your credit report for six years, although you can add a note to your report to explain all the debts were included in your bankruptcy. Individual voluntary arrangements (IVA) are recorded on your credit report in a similar way to a bankruptcy.
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