Your credit rating affects whether your credit card, loan or mortgage application will be accepted, yet half of all Brits don’t have a clue what it is or how to protect their rating.

A third of Brits have been refused a loan, but 40% admit they don’t know why – in fact, half of us fail to fully understand what a credit rating even is, according to a survey by online credit monitoring service CreditExpert.co.uk.

“With consumer debt at an all time high, being financially aware has never been more important,” says Jim Hodgkins, Managing Director of CreditExpert.co.uk. “Knowing your credit rating, understanding what it means and what will impact your credit score is a key part of financial management.”

What exactly is a credit rating?

Your credit rating is a collection of all the information held in your credit report, collated by credit reference agencies. It includes details of the credit agreements you have, such as credit cards, loans and mortgages, and shows whether you have kept up regular repayments. It is then up to lenders to make the decisions based on this data and other information that they hold or that you provide. Someone with a poor credit rating will be charged higher interest rates and may get turned down.

What could affect my credit rating?

• Past debts and missed credit card payments: Even though one in 10 of us believe lenders don’t take past debts into account, they do, believing that your current and past financial commitments show how well you will deal with repayments. “Missing a credit card payment comes at a financial cost of £12, but the effect on your credit rating can last as long as three years,” says Sean Gardner, Chief Executive of MoneyExpert.com. “That is how long the mistake will stay on your credit file and it will be used by firms to decide whether they’re going to lend you cash and what they’re going to charge.”

• Identity fraud: Protect your identity – your credit rating can be adversely affected by a fraudster even if you are not at fault, or without your knowledge.

• Credit ratings of ‘financial associates’: Your credit report does not contain any financial information about anyone else, but it does list the names of anybody with whom you have a joint account. If they have a poor credit record, your application could be refused, so it’s important to update your credit report if you no longer have joint finances with an ex-partner.

• Multiple loan or credit applications: If you’re looking for the best credit deal, ask for a quote before making a formal application for credit – because every credit check, or ‘search’ is recorded on your credit report. If you make too many applications, lenders may think that you are desperate for money, over-extended or even that identity fraud is taking place. “The worry is that people might be tempted to apply for more than one loan at a time as they know they’ll get their responses quickly on the internet,” says Gardner. “While saving time on your application may seem important, you have to weigh up what matters most – convenience or getting accepted. If time is short, the best option is to use an online credit profiling tool to assess which products are best suited to your needs before you apply. This will reduce the risk of being rejected and doesn’t take long to complete.” Some lenders can do a quotation search instead of a full credit search – ask them if this is possible if you’re only shopping around.

• Re-applying for loans or credit cards once you have already been rejected is even worse: Each time an application is made a ‘footprint’ goes against your credit file. This dent in the profile is visible to the next provider you approach and therefore could have a negative effect on the next rate they are offered. “Brits face a bit of a gauntlet when dealing with the credit card market,” says Robert Kenley, head of credit cards at moneysupermarket.com. “When consumers are finally accepted for a credit card they are often only granted a higher standard rate than they initially set out to get – this can be for a variety of reasons, but is often due to lenders offering their headline rates to lowest risk customers, and higher rates to those considered higher risk.”

• Bankruptcy: If you are made bankrupt, this will show on your credit report for at least six years. If you were judged to be a ‘reckless’ bankrupt, the details of a Bankruptcy Restrictions Order could be there for as long as 15 years. Your report may also separately show details of any debts that were included in your bankruptcy. These will also stay on your credit report for six years, although you can add a note to your report to explain that all the debts were included in your bankruptcy. An individual voluntary arrangement (IVA) is an alternative to bankruptcy and is a formal arrangement to repay a proportion of your debts over a set number of years. An IVA is recorded on your credit report in a similar way to a bankruptcy. Although becoming bankrupt or entering into an IVA will be a sensible way for a small number of people to deal with their debts, both options have serious consequences which need to be considered very carefully. These include affecting your chances of getting credit in the future and, if you are offered credit, you will be charged higher interest rates. If you are struggling to repay your current credit commitments, you should contact your lenders and get in touch with a free advice agency such as a Citizens Advice Bureau, the Consumer Credit Counselling Service or National Debtline for professional and impartial advice relevant to your personal circumstances.

Credit Rating Myths Exposed

Previous occupants of your address can affect your credit rating

No information is held about addresses – only people have credit histories. The previous occupant of your house or flat could have been a millionaire or bankrupt, but that makes no difference to lenders as they are unable to see the details of these people’s finances when you apply for credit.

Your family and friends can harm your credit rating

Historically, lenders were allowed to take into account the credit histories of people with the same surname who lived together when deciding whether to offer credit. That no longer happens. Lenders have to treat you as an individual. But they can look at the credit reports of anyone you are actually financially connected to – in other words someone you have a joint account or joint credit with.

Credit reference agencies decide people’s credit ratings and make lending decisions

Credit reference agencies simply collate the information already held in your credit report and hold it securely so that lenders can check an applicant’s creditworthiness. It is up to lenders to make the lending decisions based on this data and other information that they hold or that you provide.

If your credit rating is poor it is because you are on a blacklist

There’s no such thing as a credit blacklist. Lenders look at the information on a credit report when they do a credit check and make decisions based on their own policies. Nobody tells them whether or not to lend and there is no list of people who shouldn’t be lent money or must be refused a credit card. One lender may say ‘yes’ when another will say ‘no’.

People only have one credit rating

You will probably have a different credit rating each time you apply for credit, depending on who you apply to, what you apply for and your circumstances at the time you apply.

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