Credit ratings, finances and debt are topics that leave many Britons confused and with potentially troubling misconceptions. Here are five myths debunked.
Jonathan Such of auto finance company First Response Finance said that for many people, credit scores can be a “stressful aspect of their personal finances”.
“There are many myths surrounding credit scores, and many people struggle to understand the different credit options available,” he said.
Below, Such highlights five common myths about credit scores:
1) My credit score is influenced by my income
Fake. The amount of money you have is not taken into account by credit scoring models, and your credit reports do not show your income, so your score cannot be affected.
Credit scores are based solely on information found in your credit report. A change in your income, however, can impact your ability to pay your bills – in this case, any unpaid bills would impact your credit score.
2) I need to erase my debts to repair my bad credit report
Fake. Even though paying off debt is a good decision, making repayments on existing debt is often the best way to improve bad credit.
Missing payments or paying late can be one of the worst things you can do to your credit score.
3) I don’t have to worry about my credit rating until I’m older
Fake. The sooner you establish credit, the better. One of the biggest factors in your credit score is the length of your credit history. You should start worrying about your credit score as soon as possible. The minimum age to qualify for a credit card in most situations is 18.
4) I’m less likely to be accepted if I have a low credit score
Fake. Having a low credit score does not necessarily mean that your application will not be accepted.
Service providers and lenders will also consider other factors, such as account history and affordability. You may simply be offered a smaller amount of credit or higher interest rates.
5) My credit rating can be improved by closing a credit card
Fake. Your total available credit is reduced when you close an unused account, causing your credit usage to increase. Your credit usage is a ratio that describes the percentage of the credit you have that you actually use.
It helps to know that the majority of people with poor credit spend £1,170 more each year on credit than those with good credit.
This can include mobile phone contracts, loans, utility bills and credit cards. You can improve your credit score by understanding what’s on your credit report and spending less in a typical month or year.
Trying to understand your credit score can be confusing, but with the help of financial experts, you can gain a better understanding and stand a chance of being accepted for financing. It’s important to remember that credit is a tool, and what matters is how you use it.