Your credit score is the numerical rating assigned to you that predicts how likely you are to pay back a debt on time. Typically, your score will be in the range of 300-850, the higher your score, the better. The strength of your score is very important – it’s what lenders use to decide whether or not to give you a loan or any other credit line. It’s based on your credit report, which is made up of your credit history, which generally consists of your accounts and payment history.
Your score will be negatively impacted if you miss or are late with a payment. The real problems start however when missed payments start to accumulate over a period of months and your accounts are put into default. A default carries a heavy penalty on your score and is marked on your report for up to 6 years.
Considering its importance, there is an unfortunate amount of potentially harmful, lingering, misinformation about credit scores. We have identified 9 key credit score misconceptions and concisely debunked them for you in this blog.
Misconception 1: A bad credit score lasts forever
One of the most common misconceptions is that a bad credit score is permanent. In reality, a negative score will only follow you around if you continue to make the choices that hurt your score in the first place. For example, consistently missing payments, maxing out credit cards or running up utility bill arrears and allowing them to go to collection will make your credit score go down.
The good news is, that you can take steps to improve your rating over time. We’ll share some useful tips for you throughout this article.
Misconception 2: ‘I’ve never missed a payment my credit score must be good’
Missing payments will damage your credit score because it indicates to lenders that you can’t be trusted to repay your debt. It’s understandable, therefore, that people often assume that if they haven’t defaulted on or missed any payments they must have a strong one.
Unfortunately, there’s more to it that than that, and just because you haven’t missed any payments doesn’t necessarily mean you’ll have a high credit score. For example, if you have no credit history you may struggle to be approved for credit in the first place. The length of credit history you have is also a factor. That’s because a lender has no information about you or proof that you’re able to reliably make your repayments.
Misconception 3: ‘I have no debt – I must have a good score’
Your level of debt is a factor in your credit score, but it comes second to payment history. If you’ve paid off your debt after years of defaults, it will still take time and continued diligence for your credit score to recover. For example, if you’re debt-free because you’ve declared Bankruptcy (known as Sequestration in Scotland), then you’ll have the burden of a bankruptcy on your credit report.
Misconception 4: You need to get into debt to build a good score
It’s true that you need to use credit products to build a good credit score. In fact, if you are in a situation where you only have a basic current account with no overdraft, you most likely do not have any score at all. If you have no debts – your ability to repay your debts can’t be assessed.
Nonetheless, try to keep your credit use as limited as possible and certainly do not risk getting into debt to try and build your score faster.
Instead, you could try, opening a credit card with a low-interest rate and pay it off every month – known as a ‘Credit Builder’. At the end of the day, whether it’s through your mortgage, student loans or a credit product, a history of paying your debts on time is the most effective way to improve your credit score. You should never, however, borrow more than you can afford to build a good credit score.
Misconception 5: You have to be a high earner to have a good credit score
Income is not a major factor in your credit score. Again, essentially, it all comes down to a good history of borrowing and repaying reliably and on time. In terms of your credit score, a healthy bank balance means nothing if the money is not used to make your payments on time each month.
Misconception 6: You can only improve your score by using credit products
Again, while paying debts on time over a long period is the most effective way to build a strong credit score, there are other things you can do to make some marginal gains. The best example is to ensure you are on the electoral roll and have a fixed address. Lenders ultimately, want to know that the people they lend to are reliable and stable. Living in one place for a long time is better for your credit score than frequently moving, and being on the electoral roll proves to a lender that you are settled at your address.
Misconception 7: It takes seven years to improve a bad score
Negative information on defaults and missed payments can stay on your credit file for six years. A damaging misconception is that you can’t begin to rebuild your score until this period is up in the seventh year.
The impact of any negative information on your score reduces in weight as the years go by if you take the right steps in the meantime. For example, a default on a credit card may reflect very poorly on your score in the immediately following year. However, if over the next 3 years a lender can see that you have developed a solid track record for making your monthly payments, the default will hold much less weight than before.
Misconception 8: It takes a long time to ruin your credit rating
While building a good credit score takes a degree of patience, conversely, a good score can go bad quickly. In fact, it only takes a few months. After 6 months of missed payments, a creditor is likely to assume that you are not going to pay at all, and will ‘charge-off’ your account. This means that they have marked your debt as uncollectable. You still owe and will be pursued for the debt. A charge-off is one of the worst things for a lender to see on your report, and multiple will ruin your score in mere months.
Misconception 9: Applying for new credit will affect my score
There is a general perception that applying for or making enquiries for new loans or credit can hurt your score, but this is not set in stone. It’s possible that your credit score may not move at all after you’ve made an application and making one occasionally generally won’t make much difference in the long-term.
However, if you make several applications in a short space of time, or if you’re rejected for credit, this will probably negatively impact your score. If you need access to credit fast, a practical tip is to make the most of ‘soft’ searches to get a quote before you apply for a loan. A soft search is where a company will take a look at some initial credit report information without conducting a full credit history search. This may be a better option for you because soft searches aren’t accessible to lenders.
How to check your credit score
By using a free tool like ClearScore you can check your score and report. ClearScore will also offer you information on how your score is calculated and advice on how to improve your credit score.
A Final Note: Bankruptcy and Trust Deeds
If your debt has become unmanageable, you’re probably continually missing payments, which will, of course, affect your credit score, but there are debt solutions available, which can help you. For example, a Protected Trust Deed or declaring Bankruptcy (known as ‘Sequestration’ in Scotland).
Sequestration is the most serious factor on any credit report but its impact will reduce as time goes on and you can start rebuilding your score as soon as your Sequestration is declared. The simplest way would be to use a ‘Credit Builder’ credit card, as referred to in Misconception 4.
Entering into a Trust Deed could harm your credit rating, which is an estimate of your ability to keep financial commitments. A Trust Deed will stay on your credit record for six years. For many, a Scottish Trust Deed is the better option when their debts have become unmanageable because you can protect your assets. So, if you own a house or car, they won’t be at risk. If you’re in this situation, your credit score will not improve anyway because you’re continually missing repayments. With a Trust Deed, you can make your debts more manageable, protect your assets and allow your credit score to recover after 6 years.
If your debt is becoming overwhelming, at Trust Deed Scotland we’re here to offer free support and debt advice. We are a Not-for-profit, Community Interest Company, offering advice approved by the Financial Conduct Authority (FCA) to people with debt problems. Our expert team has helped over 16,000 people press the reset button on their personal finances with a Protected Trust Deed.
For a no-obligation assessment of your options, get in touch for a free, confidential consultation with the team on 0141 221 0999 or answer a few quick questions to get started.