The 2020 Credit Score Guide – Chapter Nine
There is a lack of transparency about how credit reference agencies calculate consumers’ credit scores. The fact that they’re shrouded in mystery means that myths develop about the whole process. More worrying is that the media often repeat some of these misconceptions, making the matter more confusing for consumers.
- Is there really a credit and address blacklist?
- The powers of credit reference agencies and universal credit score
- Data on credit reports and if scores change
- Are credit entries are permanent?
- Is there hidden data only for lenders?
- Myths about cash payments and the optimum number of lines of credit
Our intention in this article is to bust some of these myths. We’ve highlighted the 12 most common myths about credit agencies and credit ratings so we can put them to rest.
The most enduring misconceptions about credit reports:
There’s no credit blacklist
The existence of a credit blacklist is one of the most persistent myths. In research carried out by ‘Which?’, over 3/4th of those polled believed in a credit blacklist. The data on your credit history is kept in an individual file and not on a list. Lenders use this information – along with the details you provide on your application and previous financial dealings with them – before deciding whether to approve credit.
There’s no address blacklist
Some consumers are worried when they move into a new home that the credit history of previous inhabitants will have an effect on their score. There is no blacklist by address. Your credit history is kept under your own name and address.
Some people also worry about the consequences of living with someone with a poor credit score and what effect it will have. The answer is none. Despite rumours to the contrary, the credit score of people living at the same address as you (even your spouses) has no impact on yours unless you also share a financial product such as a bank account or loan.
Credit reference agencies have no say in credit approvals
Although ‘Which?’ found that 60% of British consumers thought that credit reference agencies had the power to veto a credit application, this isn’t correct. The decision is made solely by the lender according to data supplied by you, the agency and their own files.
There isn’t a universal credit score
There’s no such thing as a single credit score common to all three of the main credit reference agencies. Instead, each use a different scale and give different weighting for data contained in your credit file. This means that they might give you a different rating.
Credit reference agencies don’t all have the same data
Lenders work with 1, 2 or possibly all 3 of the UK’s credit reference agencies. This means that your credit file at each agency will be slightly different versions of the same document.
Your credit score doesn’t stay the same
Some consumers think of a good credit score as the ‘Holy Grail’ and once they’ve achieved it, they can relax. On the other hand, those with a lower score can despair because they think they’ll never be able to access credit.
You should think of your credit rating as a living thing. It’s a reflection of your credit history and spending decisions. Therefore, it can increase and decrease over time and according to how good your money management skills are.
Entries don’t stay on your credit report forever
The cut-off line for entries on your credit report is 6 years (especially for CCJs, Individual Voluntary Arrangements and bankruptcies). However, lenders are more concerned in your financial decision-making over the previous year but concentrating on the last 3-6 months. As a result, improving your financial planning will lead to an increase in your credit score over time.
Checking your credit deport doesn’t make your credit score fall
Checking your own credit report regularly makes good financial sense. It doesn’t make your credit rating drop as over a third of those polled in the ‘Which?’ survey mistakenly believed.
Lenders don’t see hidden data
Contrary to popular belief, what you see on your credit report is exactly what prospective lenders will see. There isn’t a hidden version that only they have access to.
There isn’t a ‘big brother’ agenda about credit reports
With over 15 million British adults never having requested to see a copy of their credit report, there’s obvious confusion about what it contains. Quite simply, it’s a record of your financial history. It doesn’t contain sensitive data such as criminal or medical records.
Paying in cash or having savings won’t improve your credit rating
Credit reference agencies keep no records about your savings, salary or assets. Therefore, using only cash, debit cards or prepaid credit cards won’t help your credit score. The data they keep shows what type of borrower you are and how much of a risk you represent for lenders. As a result, having no/little credit history can be as bad as a history of late payments and defaults.
There isn’t a ‘magical’ number of credit cards or accounts to possess
How many lines of credit you should have is tricky to judge. Closing down old accounts won’t magically improve your credit score. What is of more concern to lenders is how responsibly you use the credit which is available to you and how much access to credit you already have (whether it’s used or not). Keeping older accounts open is preferable as it shows stability.
What to remember about credit reference agencies and credit reports
Hopefully, this article has done a great deal to set the record straight about the role of credit reference agencies and your credit score. Knowing exactly how they work can help you when you make new credit applications and improve your chances of being accepted.
The three credit reference agencies that operate in the UK are Experian, Equifax and TransUnion (formerly Callcredit). All three agencies hold information about which lenders you have used in the past, and information about your existing debts and current credit score in the form of credit reports. These credit reference agencies are independent and have different scoring systems.
If you or your lender decides to run a credit check online, the following personal details would be required. Credit reference agencies agencies normally require you to enter your name, date of birth, phone number, and email address. Once this information has been provided, your lender will have access to your credit report and perform the necessary checks to process your loan application with them. You may also wish to check your credit report in order to ensure that there are no mistakes adversely affecting your credit score.
If you have applied for work in the UK, you are subject to credit checks by your potential employer. If you fail to meet the employer’s standards for a good credit score, you may be unfortunately denied a job. A bad credit score may lead to an employer believing that your financial situation may interfere with your ability to perform adequately in your professional role. If your credit history reveals a bad financial pattern of missed debt repayments, an employer may decide not to hire you.
Enjoyed this article? Continue to Chapter 10