The Myths and Truths That Surround Credit, Credit Scoring and Taking Out a Loan

Like the Knights of the Round Table and King Arthur, there are myths, legends, and truths that surround the mystery of our credit, credit scoring and getting a loan.

For some it can be difficult to sort the myths form the truths from the legends, plus we may only know what we have experienced.

Not everyone is going to know the terms used when applying for a loan, or how credit scoring is used in underwriting a loan, or how credit scoring is changing.

We also may hear these stories about things such as a “black list” or you’ve been black listed and cannot get credit.

Hopefully, this will aid in sorting out what you may have heard, from what really happens.

Myth: There is a black list for people who have bad credit.

There is no such list, a specific list of those people who have bad credit or low credit scores.

When you apply for a loan, or in some instances an insurance policy or some jobs, your credit report is viewed, and also your credit score.

If you have a low credit score, or bad credit, meaning your payment history is poor, or you are in too much debt, you can be denied the loan.

This decision can be based on credit scoring, and affordability. There is no specific list lenders or anyone can look at to see yours or anyone else’s name, and use it as a basis to grant a loan.

A big, fat, myth.

Myth: It’s not fraud if I fail to mention something on my loan application.

Unfortunately, this is more like a lie, which also ties in with non-disclosure, and inflating income.

All of which is not good, and can be viewed as fraud. And fraud is such an ugly word.

Non-disclosure is where you fail to mention something, or don’t disclose it; usually in the hopes that the person asking, such as lender or insurer, doe not find out.

You may decide not to mention any CCJ’s or a bankruptcy from years ago, or maybe a bankruptcy in another country. That was years ago, how will they know.

The fact is on many loan applications for a mortgage, the broad question can be asked, “have you ever been bankrupt?”.

This is not asking have you been bankrupt in the past six (6) years, or have you ever been bankrupt in the UK, just have you ever been bankrupt.

If you fail to address the question fully, for example maybe you were bankrupt 10 years ago, even if it doesn’t hinder your loan, and even if the lender may not have cared that you were bankrupt 10 years ago, it still is failure to disclose.

The penalty for doing so, it may be nothing, and may never be found out, however in an extreme instance, it could be considered a fraudulent effort on your part.

Inflating income in another one that seems to be used a lot.

A lender asks you your income, you inflate it by a few hundred pounds a month, and your loan is approved, you show affordability. Even though the lender may not have asked to see proof of wages, or bank statements.

Should you later default on the loan, the lender may look more closely at it, wondering why you are struggling with the payments, when you had sufficient income to afford the loan initially.

In the insurance industry there is a lot of fraudulent claims, and crash for cash schemes, however the one major thing many people do which is fraud, is to use a different address for where their car is parked at night, then where it really is parked. This is due to insurers offering different and sometimes lower premiums, for various post codes.

Use a friend or family member’s post code, get a lower premium.

Have an accident, the insurer finds out about the wrong post code, the claim is denied, and you are out of pocket and more.

Being as truthful as possible on all applications, loan, insurance, and others, is important.

Myth: Everyone will know if I go bankrupt.

This is not true, and another aspect of this that worries people is that their landlords will be notified of their bankruptcy, or their employer.

When you go bankrupt you are placed on the Insolvency Register for the period of your bankruptcy, plus an additional three (3) months.

While this is a public register, and anyone can view it, unless someone knows you are bankrupt, it is doubtful they are going to search it.

Bankruptcies are no longer posted in local papers or public places outside of the register, and the London Gazette.

As to who is notified, your creditors, your bank, some professional bodies, the local authority, and some water and energy suppliers.

Landlords: Your landlord does not need to be notified if you go bankrupt, especially if you can provide a copy of your tenancy agreement. The Official Receiver just needs to be sure you do not have an interest in the property.

Now here comes a real dilemma, and relates to full disclosure or not.

Many standard tenancy agreements have a clause that states if the tenant goes bankrupt, the landlord has the right to ask the tenant to move.

The question and dilemma becomes if your landlord is not notified of your bankruptcy, should you tell them?

By telling them, they may request you leave.

Tough call.

It is hoped that if you have been paying your rent on time, and been a good tenant, your landlord would not enforce that clause in the tenancy agreement. The agreement may not even have the clause, in which case you are under no obligation to inform them.

Employers: Your employer is not told or notified that you are bankrupt, however, the OR may issue a NT or no tax, code. This does not mean you will owe taxes, but any taxes you pay may be captured for the bankruptcy.

If your employer is familiar with this code, they may know you are bankrupt.

Your Bank: Banks are notified that an account holder has gone bankrupt, and previously, froze the account holder’s account. This was due to the fact the banks were concerned they could be seen as allowing you to have an asset, or money while bankrupt.

Banking laws were changed, and unless you owe you bank money, the account should not be closed, however to be on the safe side, opening a neutral bank account at another bank is advisable.

Truth: Not paying my accounts on time is the most damaging to my credit score?

This is a truth, and an important one.

Our credit score currently is calculated by five factors:

* Payment history 35%

* Balances 30%

* Types of accounts 10%

* New credit 10%

* Length of credit history 15%

As you can see, your payment history being 35% of what makes up your credit score is the lion’s share. If you pay accounts late or default, your credit score can be reduced rather quickly.

Truth: Credit scoring guidelines and how scores are calculated is changing.

Yes and no, but a truth over all, and I’ll explain.

In some parts of the world, such as China, social credit scoring is being implemented.

Social credit scoring is the use of other factors in addition to how you pay your accounts to come up with a social credit score.

Things like your social media usage, what you purchase and how you purchase it, and other personal and social factors to be added to create a numerical score.

There also is the use of “digital footprints” in creating social and credit scores. These footprints can be passive, such as when you are surfing the web and visiting various web sites, or active footprints where you log into a site, email account, or make a purchase online.

So in many ways, credit scoring is changing. So truth.

Part Myth – Part Truth: It’s a Catch-22, you cannot get credit unless you have credit, and if you cannot get any credit, then how can you get a loan.

If you apply for a loan and have no credit history, or no credit score, then yes, it can be difficult to get approved for a loan. Difficult, not impossible.

You can do one of two things:

* Look at loans that are not based on credit and credit scores

* Create a credit score for yourself

Loans that do not require credit scoring as a means to be approved, such as guarantor loans, are a way to get a loan, and begin getting credit. You just need to show affordability, and have a guarantor.

Creating a credit score is a bit different.

If you are a tenant and paying rent, have your landlord begin reporting to the Rental Exchange, so you can get credit for paying your rent.

Rent payments are not usually reported to the credit bureaus.

In addition, get on the electoral role. Lenders use this to verify and confirm your address and that you reside there.

For secured loans, save up a larger deposit. The larger your deposit, the better your chances of being approved for the loan.

Truth: After 6 years a debt is no longer owed.

In order for an account to be Statute Barred, you must have had no contact from the creditor for a period of six (6) years. After 6 years, all accounts are supposed to automatically drop off your credit history.

The question is, if a creditor attempts contact with you, but you may have moved and not updated them with your details, does this constitute contact?

In most instances, after 6 years a debt can be statute barred and no longer owed.

Legend: There was someone once who took out a dozen loans all in one day and ran off with the money.

Highly unlikely.

Every time someone applies for a loan, the lender will review their credit report, and in doing do leaves an inquiry or footprint behind.

This footprint shows the date and time and lender who looked at the credit report.

While someone could apply for a few loans at once, and possibly be approved, the time frame of being approved to accepting the money, and without the knowledge or hint, of all the other lenders, makes this scenario unlikely.

If you had a good credit score that allowed you to be approved for multiple loans, too many inquiries, or footprints can reduce your credit score. Not too mention running off with the money and not paying.

That may show it was a thought through plan, and could be viewed as criminal fraud.

Myth: Moving in with some who has bad credit will lower your credit score.

This is not true, and neither is marrying someone with bad credit and owing money makes you responsible for their debts.

Everyone has their own credit report and credit score.

Unless the account(s) are jointly held, or you have signed as guarantor for the account, they are not your responsibility.

Truth: Apply for and receiving a loan has become easier due to the Internet.

This is very much true.

Most loans are applied for online, and can be approved very quickly.

The days of filling out a long and complicated loan application, and waiting to hear back if you are approved or not are in the past.

Even mortgages can be approved in principle very quickly.

Truth: Credit cards can be a good way to make a purchase and pay for it over time, without taking out a new loan.

In some instances this can be very true.

It can depend on a few things:

* The cost of the purchase

* How long you plan to pay it off on the credit card

* The credit card’s interest rate

* What other loan options are available

Credit cards can be a useful short-term borrowing solution, but you need to know the answers to the above questions.

You need to make sure you have enough credit to make the purchase, and make sure you pay if off soon by paying more then just the minimum monthly payment.

In some instances you may be able to find a short-term loan with better rates to make the purchase.

Myth or Inaccurate: A debt consolidation loan hurts your credit.

This is not really true, however, in most instances a debt consolidation loan can reduce your overall monthly payments, which can free up some money for you to pay more each month on the new account, and be out of debt quicker.

In addition, if you close the other accounts, but not if they are your oldest accounts, this can improve your credit score as well.

Perspective: Student loans are good debt, and even having £25,000 in students does not affect your credit.

This is true, but I can depend on whom you ask, as to if student loans are good debt.

Some people feel that debt is debt, but some feel that debt such as a mortgage to buy a house, student loans to get an education and earn more, are good debt.

The fact that student loans have such a flexible and good payback arrangement, make paying them back easy, but you are still accruing interest shortly after graduation.

Student loans do not affect your credit score, this is also partially true, as they are not reported to the credit bureaus.  However, if you were to default on them, and they were sent out to a collection agency, this then could affect your credit.

While not affecting your credit, for some large loans, such as a mortgage, the student loan payments may be held against you in calculating what you can afford in a mortgage.

Myth: If I leave the country I don’t have to pay my bills.

Another famous myth perhaps started at the Round Table hundreds of years ago.

You are not liable for your debts and bills just because you move outside the UK, or any bills and debts you may owe in other countries become null and void, just because you move back to the UK.

Moving and changing countries does not relieve you of the responsibility of the debt.

In fact, the account could be sold onto a collection agency or sister company to collect the debt in the country you now reside in.

Truth: If I need a loan to start-up a new business, the bank will have me guarantee the loan.

This is usually true.

If you try to take out a loan in the business name, and it is a new business with no history or track record of success, the bank or lender can ask for the owner or a Director of the company to sign as guarantor for the loan.

That Depends: When I die, my debts die with me.

This is going to depend on a few things, and one of those things revolves around estate planning and who you owe and how much you owe.

If you have no real estate or assets, then your creditors don’t have anything to go after to settle the account(s). So the debts do die with you in a sense.

The accounts or debts don’t die or go away, there is just no one or no way to pay for them sometimes, so they become uncollectible.

Myth: The loan with the lowest interest rate is the best deal.

Myth, not always true.

A low interest rate on a loan can save you money, there is no question there, however, there can be other fees and charges added onto the loan which in the long-run does not make it the best deal.

If there is a pre-payment or early settlement fee, and you plan to pay the loan off before the full term, this needs to be taken into consideration as well.

Maybe Myth: I can get a better deal on a loan I I go through my own bank.

Maybe, maybe not.  You may need to shop around.

This is why using a credit broker can be helpful in finding not just the best deal, but the bust suited loan for you and what you are looking to do.

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