Credit myths: what actually damages your credit rating?

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Array of credit cards

When you're applying for credit, it can be difficult to fathom the mysterious ways of the credit card company, and how they determine whether you are worthy of credit (and what rate you deserve). In the absence of explanations, we concoct our own outlandish reasons for why we have been turned down - from our spendthrift ex-partner to a suspicion that a credit rating agency has blacklisted us.

But why have you really been turned down for credit?


The decision as to whether you are offered credit (and sometimes what rate you are offered) is entirely up to the lender in question. They will have a specific set of criteria for the kind of people they are looking to lend to, and a big part of their assessment of whether you fit the bill will be your credit report.

These are held by credit reference agencies, of which the largest in the UK is Experian. They contain details of all the credit you have had over the last six years, how much is available to you right now, and how much you have outstanding at the moment. They will also show whether you have always paid your debts on time and whether there's anything like a bankruptcy in your past.

Myths

There are a number of common myths surrounding these reports - and all of them are entirely untrue

1. "The credit reference agency told them not to lend"
It's not up to the reference agency: decisions are made by the lenders themselves. They will use the information from your credit report to put together a credit score, and the score will determine whether or not they lend. That's why one bank will look at your report and decide you're too much of a risk and another will gladly hand over the cash.

2. "I'm on a credit blacklist"
This is a common misconception, and it's entirely untrue because these blacklists don't exist.

3. "It's because of the guy who used to live at my address"
The previous occupant will not be on your report unless you shared a financial connection such as a joint account. Lenders don't care if there are debt collectors chasing the former occupant. On the flip side, your former addresses will be on your credit report - and lenders like to see that you don't move around too much.

4. "It's because my partner is always in debt"
There are no automatic links with friends and family - even those you live with. The only time a credit reference agency will list someone else on your report is if you have a financial connection, like a joint account or mortgage. If you have a financial connection then some lenders will examine their report too before deciding whether or not to lend.

5. "It's because I've borrowed before"
Lenders actually like to see that you've borrowed money in the past. They also like to see evidence of you repaying in full and on time. If you have never borrowed before, some lenders are nervous about lending to someone with no history of repayments.

6. "I've been turned down so no-one will ever lend to me"
If you have been turned down by a lender it means you don't meet their criteria for a loan, but it doesn't mean that everyone else will automatically shun you. Even if there's a good reason why you have been turned down - and you have problems in your past - then six years after the problems have been cleared up they will no longer appear on your credit report.

7. "It must be a mistake, because loads of other people have lent money to me"
If you have a number of loans or credit cards outstanding, then this may be the reason you have been turned down for more. Lenders don't like to see large amounts owing on multiple accounts - especially if you have borrowed up to the limit on each of them.

What can you do?
If all of this has left you scratching your head as to why you have been turned down, then your best bet is to get hold of your credit report, and have a look at what the lenders are seeing.

Your first step should be to read through it and check everything is accurate and up-to-date. If there's an error on there you need to get in touch with the lender or organisation that made the error, and you should be able to arrange for the mistake to be amended. If you are still linked with an ex-partner, it's worth getting in contact with the organisation linking you and arrange for the link to be broken - so you are no longer affected by the actions of an irresponsible ex.

If it's all correct, you need to look at the things that are likely to have counted against you, and do what you can to put them right. Sometimes this is straightforward: so, for example, if you are not on the electoral register, this is something you can sort quickly and easily.

Other times this is more complicated. So, for example, if you have multiple credit cards which are all maxed out, there's no quick and painless way to take this off your credit record and get another credit card.

However, at least you will know where you stand, so you know what you need to do in order to mend your credit record, rather than blaming it on a blacklist or the guy who rented your home before you did.