Loans and Your Credit Score: Five Myths Answered By a Lender

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We all recognise that credit scores are important when we apply for borrowing. Still, there are countless misconceptions about how lenders evaluate creditworthiness.

In this guide, we’ve worked through five of the most common myths, using expert insight provided directly by quick loan provider Wonga to ensure you have all the essential information before applying for a loan

Myth 1. Being Rejected for a Short-Term Loan Will Lower Your Credit Score

A regulated lender will conduct a soft check on your credit record before they make an initial proposal because they need to identify any serious credit problems that preclude them from offering you a loan.

However, if, at this stage, you do not pass their eligibility requirements, you’ll likely be turned down without the check stored on your credit file. Like many myths, this is grounded in truth because if you proceed to a formal application, any respected lender will process a hard check to inspect your credit history in greater detail.

Truth: Multiple Hard Credit Searches Can Be Detrimental

Having lots of hard credit checks on your file can indicate an attempt to apply to any and every lender who is likely to approve you – this can lower your credit score, and lessen your ability to apply for credit in the future.

Myth 2. Repeatedly Checking Your Credit File Will Damage Your Credit Record

Depending on where you live, you can download a copy of your credit report from credit bureaus such as:

  • Experian
  • Equifax
  • TransUnion

There is no harm whatsoever in accessing your credit report; this is an important starting point if you are planning to apply for a loan, mortgage or any other kind of long-term financial commitment.

Truth: Checking Your Credit Score Is Worthwhile, & Can Help You Improve Your Financial Position

When you check your credit score, it constitutes a ‘soft check’, meaning your activity isn’t logged or recorded on your credit file. Lenders have no interest in knowing when or how often you have reviewed your credit, but it can be a proactive way to spot errors, monitor your score, and assess where you have improvements to make.

Myth 3. Provided You Make On-Time Repayments, Multiple Loans Won’t Impact Your Credit Score

Credit scores aren’t purely about whether you’ve ever been late with a payment or had a lender take legal action against you. They reflect a broader picture of your financial behaviours, including your credit utilisation.

Truth: A High Level of Debt Will Affect Your Ability to Apply for More Credit

Maxing out every credit card and loan facility you have indicates a lack of financial stability and often implies that you are relying on borrowing to cover everyday expenses. Lenders prefer applicants with lower utilisation who only borrow as necessary.

Myth 4. Your Credit Score Is Based on Your Income and Outgoings

Your income can be a factor when a lender assesses your affordability – they need to ascertain that you can cover the cost of repayments. However, your credit score doesn’t have any direct correlation with your salary.

Responsible financial management is assessed against on-time repayments and factors such as the percentage of available credit you are using rather than your income.

Truth: Credit Scores Are Based on Credit-Related Activities, Not Your Earnings

Applicants with a modest income and no history of credit issues can have a significantly better credit score than another person, even if their income varies considerably.

Myth 5. Taking Out a Loan Is Easy if You’ve Never Had Any Borrowing

Low credit scores aren’t exclusive to people with defaults or missed payments. If you have never used credit of any kind, you will normally have a low credit score simply because there is no repayment history to evaluate.

Truth: A Low Credit Score Due to Zero Borrowing History Can Make it Harder to Access Credit

Loan applicants can build a healthy credit score, without taking on unnecessary borrowing, using credit builder accounts or registering to vote. Although it’s difficult to secure a loan if you have no credit history whatsoever, it’s equally inadvisable to take on debt you don’t need solely to boost your credit score.