Baffled by your credit score? Don’t be. Credit scores are actually pretty straightforward. However, there are a few credit score myths out there that need clearing up. To help you separate the fact from the fiction, we’re de-Baffling 5 credit score myths you should know about.
1. You only have one credit score
There isn’t just one universal credit scoring formula. Here in the UK, there are actually four main credit refencing agencies and for each of them you’ll have a different score. So, before you apply for credit, double check your score with the credit referencing agency that particular broker or lender is using. That way, you can make sure there aren’t any errors on your report before you make an application.
2. Not needing to borrow money means you have a good score
False. If you’ve never borrowed money before, it’s possible your score could be pretty low. This is because lenders use your credit history to decide whether you’re a risky person to lend money to. If they have no information to go on, it’s likely they’ll assume you’re riskier than you are.
If you think this could be you, you could look into getting a credit card to build up your score. By using a credit card a little each month then repaying it in full, you’ll gradually show lenders you’re a responsible borrower. This means that if you do need to borrow money in the future, for instance for a mortgage or paying for a new car, you’re likely to be offered much better rates.
3. Paying off a missed payment removes it from your report
Unfortunately, simply paying off what you owe after a repayment deadline won’t remove a missed payment from your credit report. Missed or late payments will stay on your credit file for up to seven years. So, even though the negative impact of this will reduce slightly over time, it’s best to simply avoid missing a payment altogether.
However, if you’re worried about making future payments, there are a few things you can do:
- Speak to your lender before you miss a payment: get in touch with your lender as soon as possible to find out what options are available to you. Depending on the type of finance and your lender’s terms and conditions, you may be able to work out a solution.
- Check if you’re able to take a repayment holiday: some lenders can arrange for you to take a repayment holiday if you suddenly need a break from making your repayments. However, it’s important you fully understand what this entails as you’ll usually have to make up the payments at a later date.
- Check if you’re eligible for a balance transfer card: if it’s a credit card you’re worried about, you may be able to transfer the balance (for a fee) onto a credit card that has an interest-free introductory offer. This means that you may be able to get a bit of breathing space with your repayments, however you will pay interest on the full balance when the offer comes to an end.
4. If you have a good income, you’ll have a good credit score
In fact, your credit score doesn’t take your income into account at all. It is simply based on how you’ve borrowed money in the past. So, even if you have a healthy income, you might find that your credit score isn’t a good reflection of your current financial situation.
That’s why here at Freedom, we’ve developed the Fusion Score to rectify this. The Fusion Score combines both your financial data and your credit history to give lenders a fairer picture of your finances. This could help you receive better rates on loans and credit cards, or find you an offer that was otherwise out of reach. To find out your Fusion Score, access it for free in myfreedom.
5. All debt is viewed as bad
Although being in debt is often seen as a negative, some types of debts are looked on far more favourably by lenders. For instance, owing a mix of lenders a lot of money might appear as a red flag. However, if you owe £250,000 to your mortgage provider, or you have short-term debt owed to your credit card provider, this will be looked at in a more positive light – and could even improve your score.