Most myths contain a kernel of truth. However, layers and layers of fallacies, misconceptions, make-believe and downright untruths surround that kernel - and, in this respect, myths connected to credit checks are no different from any other. This is unfortunate for several reasons. However, from the perspective of someone hoping to buy a property, a lack of knowledge about how credit checks operate and why they are important to mortgage applications can make the difference between a successful purchase and a frustrating period spent trying to improve a poor credit score while watching sold property prices rise ever higher.
In no particular order, let’s look at some common myths.
Myth one: my spouse’s county court judgment will pull down my credit score and stop us getting a mortgage
The truth: Your spouse’s finances do not affect your credit rating simply by virtue of the fact that you are married. A spouse’s county court judgment or other financial indiscretion may affect your ability to obtain a mortgage only if your finances are linked via joint credit (for example, in the form of an existing mortgage or other loan). In this one specific circumstance, a mortgage lender may take your spouse’s credit report into account when assessing your ability to repay new borrowing.
Myth two: the credit reference agencies have blacklisted my home address
The truth: Your credit rating is affected only if someone else with poor credit history has - or perhaps had - a financial connection with you. It doesn’t matter whether or not this person lived at the same address as you. Despite this, the common belief that particular addresses are “blacklisted” because someone with a poor credit history previously lived there persists. Just remember, however, that it’s people and not addresses that have credit records.
Myth three: I have a bad credit score so can’t get a mortgage
The truth: While it’s true that your credit score is an important ingredient when it comes to getting approved for a mortgage, there’s no magic threshold. Partly, this is because each of the three major UK credit reference agencies operate different systems and what falls into the “poor credit rating” bracket at one agency may not at another. Moreover, different lenders use different credit reference agencies - and you will not necessarily know which uses which. Partly, however, it’s because despite the use of the word “ingredient”, this is not a recipe and your mortgage application does not automatically pass or fail on the strength of your credit rating. A more common consequence is that a lower credit score makes obtaining more preferential mortgages (terms and interest rates) harder.
While it may seem counterintuitive that someone with a good credit rating can usually access a better (i.e. cheaper) deal than someone with a lower score, it makes sense when you think about it from the lender’s point of view: an applicant with a good or excellent credit score has a proven track record of managing their finances well and so presents less risk of defaulting on their mortgage. However, a broker specialising in applicants with poor credit scores may be able to help you find better deals or, equally, advise you when it’s best to concentrate on building up your score before reapplying for a mortgage in the future.
Myth four: the less credit I use, the better my credit score
The truth: Contrary to many headlines in the press, the UK is still home to a substantial minority number of people who regard credit as something to be shunned at all costs. This is often to do with upbringing, representing a hangover from post-war attitudes that regarded any debt aside from a mortgage as undesirable, potentially unmanageable and sometimes even shameful. Of course, attitudes have moved on among most of the population, but even those that do not fear debt in the same way their grandparents might have done don’t always know how to make credit work for them. This is partly a question of financial education (or lack of it) and of insufficient understanding about the importance of credit agencies and ratings.
Whether or not you have a credit score at all depends on whether you’ve ever applied for credit. As soon as you do so, whether it takes the form of a contract mobile phone plan, a credit card, car loan or some other form of credit, the lender will make a report to their credit reference agency. This is the beginning of your first credit score.
A lesser known fact is that failing to use existing credit facilities for a certain period of time (typically 24 months) can result in a credit file with insufficient data to generate a credit score. This is an excellent illustration of how payment history goes towards the algorithms that generate credit scores.
Myth five: my credit score will be the same at all of the credit reference agencies
The truth: As already explained, each of the three major UK agencies uses a different scoring system. While it would be uncommon to have an excellent score at one agency and a poor one at another, less dramatic differences occur more frequently and can make the difference between acceptance and refusal of a mortgage application.
Myth six: there’s no point trying to improve my credit score because it will take so long that sold property prices will have risen far beyond my reach
The truth: A single late or missed payment on a credit card can have an instantaneous effect on a credit score. Equally, you can take several simple steps to improve yours - and you won’t necessarily have to wait months to see an improvement. For example, ensuring you are on the electoral roll will make your credit score rise straight away. Closing any unused credit accounts can also help, although you’ll want to remember that it may also cause a temporary drop in your rating. A track history of timely repayments may be more of a slow burn, but is still always worth doing. Finally, remember that even a small rise can be enough to ease you over the finishing line of a mortgage application.
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