The Myth Of The Indebted House

A key part of managing your finances properly means understanding how your credit rating works and knowing what will impact your credit score.

Many moons ago, shortly after I'd moved in to my newly-acquired house, my application for a Debenhams store card was turned down. Initially, I assumed it was because I was mortgaged to the gills but, no, when I queried it, I was told it was because my home was blacklisted as a debtor's house on my credit report -- or words to that effect.

Apparently the old lady who'd lived there before me hadn't been very good at paying her bills and I was therefore guilty by association because I now owned the house. Needless to say, I kicked up a fuss and got my store card -- a decision that still annoys me today because I didn't manage my finances very well in those days, so ended up paying plenty of interest for the privilege.

Regular readers of The Motley Fool will know that this tale is either completely untrue or the rules have changed since 1983. That's because previous occupants of your home cannot possibly affect your creditworthiness. Lenders carry out credit checks on people, not addresses, and can't access the financial details of past residents of your home when they check your credit files.

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

According to CreditExpert, the online credit monitoring service from Experian, 63% also believe that family and friends can harm the credit rating of people they live with. But negative information about either your or their finances does not have an effect on household members unless you have joint finances with them such as a mortgage, loan or bank account.

Until a few years ago, lenders were allowed to take into account the credit histories of people with the same surname in a household but that no longer happens. Lenders have to treat you as an individual.

To dispel further myths, credit reference agencies do not hold credit blacklists on people, the so-called 'credit repair' firms cannot improve your credit rating as information on a credit report can only be changed or removed if it is inaccurate. What's more, your credit report does not show whether credit has been refused, only that you made an application.

The main things that do affect your credit report are:

• Past debts - a note of missed payments stays on your credit report for three years while details of court judgments, bankruptcies or defaulted accounts stay for six years;
  
  
• A stolen identity - your credit rating can be badly damaged by a fraudster pretending to be you even though you are not at fault and know nothing about it;
  
  
• Multiple loan or credit applications -- every credit check, or 'search' is recorded on your credit report so 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. If you're merely shopping around for the best deal, ask the prospective lender if they can do a quotation search instead of a full credit search.

The important thing is to check your credit files occasionally to ensure nothing is amiss, correct any mistakes and, if you want to ensure your report looks good when lenders take a look at it, pay all bills on time and don't borrow too much.

You can find out how to get a free copy of your credit report in our Credit Report Centre.