“Before I buy your house, can I see your credit rating?”

Almost three-quarters (71%) of adults in the UK incorrectly believe the people who lived at their address before them can affect their credit rating.

And according to research released today, which exposes common misconceptions behind current ‘credit folklore’, half (50%) of us don’t fully understand what a credit rating is.

Commissioned by CreditExpert.co.uk, the online credit monitoring service from Experian, the research reveals that a third (33%) of us have been refused a loan, but that four in 10 (40%) do not know the reason why.

As consumer borrowing in the UK reaches an all time high of £1.2trillion, the need for people to understand their credit status and how they can improve it has never been greater.

CreditExpert has unveiled the most commonly believed credit rating myths to help people distinguish between fact and fiction surrounding their ‘Credit CV’.

71% believe previous occupants of an address affect current residents’ credit rating: Wrong: 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.

63% believe family and friends can harm the credit rating of people they live with: Probably wrong: 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.

53% believe credit reference agencies decide people’s credit ratings and make lending decisions: Wrong: Credit reference agencies collate the information held in a credit report and hold it securely so that lenders can check an applicant’s creditworthiness. Information in your credit report 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 up to lenders to make the lending decisions based on this data and other information that they hold or that you provide.

41% believe if someone’s credit rating is poor it is because they are on a blacklist: Wrong: 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. In fact, one lender may say ‘yes’ when another will say ‘no’.

29% believe people only have one credit rating: Wrong: 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 – because it is your application which is rated, or scored.

Credit ratings demystified

So what does affect your credit rating? Many things can impact on your credit score and how your application for credit is viewed by lenders, including:

Past debts: Even though one in 10 (12%) of us believe lenders don’t take into account past debts, they do. Evidence of missed repayments stays on your credit report for 36 months and is used by lenders to see how well you manage your existing credit commitments. Details of court judgments or bankruptcies or defaulted accounts stay for 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.

Identity fraud: Protect your identity – your credit rating can be adversely affected by a fraudster even though you are not at fault and sometimes 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. 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.

Bankruptcy: If you are made bankrupt, this will show on your credit report for at least six 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, the interest rates you will be charged. 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.

Jim Hodgkins, Managing Director of CreditExpert.co.uk, comments: “With consumer debt at an all time high, being financially aware has never been more important. Knowing your credit rating, understanding what it means and what will impact your credit score is a key part of financial management. At CreditExpert we are constantly trying to demystify the credit granting process to help people to map out their financial future effectively.”