Managing my money for young adults
Managing my money for young adults

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Managing my money for young adults

5 Credit ratings: myths and facts

There are quite a few misrepresentations of how credit ratings are formed. Have a go in the next activity at separating the myths from the reality.

Activity 4 Myth or fact?

Allow about 10 minutes

Which of these are facts and which are myths when it comes to credit ratings?

  • A.National credit blacklists exist
  • B.Having no credit history is a drawback
  • C.Having borrowed from many lenders helps
  • D.Student loans impact on ratings
  • E.Not using the credit cards you already have is a problem
  • F.Previously declined applications count against you
  • G.Your credit file influences the interest rate you get
  • H.Paying a utility bill late can hit your rating

Feedback

OK, let’s look at which of these are myths and which are facts.

Table 2 Myths and facts about credit ratings

Myth or fact Feedback
National credit blacklists exist Myth – no they do not exist.
Having no credit history is a drawback Fact – without a history there is no proof of your creditworthiness.
Having borrowed from many lenders helps Fact – this indicates that many lenders have already approved your creditworthiness and provides information for ratings agencies to make assessments.
Student loans impact on ratings Myth – they are disregarded when it comes to credit ratings. Lenders – particularly mortgage lenders – will, though, take student loan repayments into account when assessing how much they are prepared to lend to you.
Not using the credit cards you already have is a problem Fact – if you have unused cards then you have unused credit capacity that is available for you to use. The perceived risk is that you may use this capacity to go on a spending spree, amassing debts in the process that you then have difficulty repaying.
Previously declined applications count against you Myth? – A trickier one. Lenders might ask if you have had other applications to borrow money declined in the recent past. The credit rating agencies will keep records of how many applications you’ve made for credit but not of the numbers accepted or rejected. However they may be able to detect how many have been accepted by the record of the accounts you have open.
Your credit file influences the interest rate you get Fact – increasingly lenders are adopting risk-adjusted pricing when it comes to debt products. The better your credit rating the lower can be the interest rate you pay when you borrow money.
Paying a utility bill late can hit your rating Fact – increasingly the credit rating agencies are accessing data from utility firms and ‘phone companies. If you are a late payer of bills this could hit your credit rating.
Adapted from MoneySavingExpert.com (2017)
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