Unmasking Common Financial Myths

There are several common financial myths that carry on circulating, despite being misleading. It makes good sense to get up to speed on the most common of these so that you can get the most out of your financial planning.

Common Myth 1: Lending decisions are decided by credit reference agencies

The purpose of a credit reference agency is to put together and store your credit report safely. They do not make lending decisions; they are simply providers of your credit footprint. The lenders are the ones who will ultimately decide whether to proceed, and they do this based on several different criteria — not exclusively your credit rating score.

Common Myth 2: Past debts don’t follow you

Sadly, for many of us debts accrued in the past do count. If you have any IVAs (Individual Voluntary Arrangements), non-payment of debts or bankruptcies to your name from the past six years, these will show upon your credit history. Even something as seemingly innocuous as a missed repayment on a credit or store card can affect your rating, as there may be a red flag for unreliability, something that most lenders are very wary of. After six years, though, the slate will generally be wiped clean as far as your new lender is concerned, as a historic debt is not necessarily relevant to your current ability to repay a loan.

Common Myth 3: If you’ve borrowing for the first time, you’ll get a better deal

If you are borrowing for the first time, the lender will have no basis on which to predict your future reliability. This can in some cases be a basis for them to turn you down. Many lenders will be reassured, though, with some proof of good financial management in some form. Many people worry that if they are self-employed they will struggle to find a lender. In reality, there are several companies out there who will take your individual circumstances into account and will happily offer a self-employed loan.

Common Myth 4: Credit ‘blacklists’ exist

There is actually no such thing as a credit blacklist, and your gender, ethnic origin and religion are all entirely irrelevant to your credit rating. Many lenders will require an accurate picture of your current financial circumstances — how much you owe in total and your repayment history to date. A responsible lender will want to ensure that you are not taking on a financial burden that you will not be able to manage.

Common Myth 5: Others living under the same roof can affect your credit rating

Friends and family that you live with will not affect your credit unless you share a financial connection such as a jointly held mortgage, for example. Living with someone is not the same as having this connection.

Common Myth 6: If you repay your credit cards in full, your credit score will lower

This is just not true. In reality, you’re actually likely to get an improved credit score, as it is evidence both that you are able to manage your borrowing and can afford it. A lower score will come as a result of always making the minimum repayment, missing repayments or borrowing up to the very top of your credit limit.

Common Myth 7: It’s irrelevant how many credit accounts you have

Lenders need to be certain that you are able to afford additional credit, so they will look on an application more favourably if you don’t already owe significant sums across several accounts. They may also give preference to applications from customers who do not rely heavily on their current credit agreements. Ideally, you should aim to keep your borrowing on credit cards to under 25% of your limits.

How to borrow safely

Very few of us can avoid borrowing money at some point or another. Unless you are lucky enough to be born into a rich family, you will probably look to borrow money from quite a young age to study at university, to buy a car or to finance a holiday.

As for buying a home, who can afford to do that without borrowing money as part of a mortgage? Although borrowing is unavoidable, it is often a very positive and necessary action to take – as long as you do it safely.

If you need to borrow a sum of money, however much, it pays to do your research first. By being aware of all your options, you can save yourself a considerable amount of money by whittling down the right loan option for you. This involves a number of variables that are specific to you, including the amount you need to borrow, how quickly you can repay it and your credit score.

What is the best borrowing option for me?

If you only need to borrow a small amount, the cheapest way to do this is to borrow from your bank by arranging an overdraft. Your bank won’t charge you a setup fee for this, and interest rates are far lower than those of any payday loan company.

If your bank won’t give you an overdraft, however, or extend the one you already have, your next best bet is to take out a credit card which offers zero percent interest for the first six months and put all purchases on that. If you take this option, you do need to be disciplined about paying off the balance before the interest-free period is over if you want to avoid higher interest rates.

If you want to borrow money in order to buy a car, it is worth considering hire purchase or personal contract purchase (PCP). Check the interest rates being offered to you, first. If they are higher than a loan from a bank or building society, borrow your money from them instead and pay for the car upfront.

Secured homeowner loans

Secured homeowner loans are a great solution if you need to borrow a larger sum, perhaps to consolidate debts, to buy a new kitchen or for other home improvements. You could increase your mortgage or even remortgage your home, but you will need to have sufficient equity to do this.

Secured loans are also a viable option if you wish to borrow a large amount of money but you have a less than perfect credit score. Your property is offered as security to the lender, who can take action to repossess the property if you fail to repay the loan, just as with a mortgage. If you are confident that you can meet the repayments, homeowner loans can be very useful.

Again, it pays to shop around. Most lenders will charge an arrangement fee, and you may have to pay to have your property valued. As always, compare the different interest rates that lenders are offering. Be a wise borrower and you will find that you can save yourself a considerable sum of money.

Benefits of consolidating your debts

Being in debt can be one of the most stressful things in people’s lives. Most of us will move our debts around to try to gain the best rate, all the while trying to pay off as much as we can. Unfortunately, though, it seems that before we get ourselves straight, something else always comes along — perhaps a home emergency, an unexpected problem with the plumbing or a broken-down vehicle.

All of these can lead to a necessity to borrow more money on a different credit card or by taking out a loan. Whilst aiming to get the best rate of interest on the money we owe, we can often cause ourselves confusion and even additional expense.

At the very least, monthly repayments can end up being more than we need to pay, and in some instances more than we can afford. This can lead to people living hand to mouth just to keep up with repayments, damaging their quality of life.

One possible solution is to consolidate existing debts into a single, more manageable payment each month. Both homeowner loans and debt consolidation loans can be useful for this purpose, allowing you to budget more effectively and avoid getting into further debt in the future. It can also simplify your finances.

Another advantage of consolidating your debts is for your own peace of mind in terms of knowing exactly when you will become debt-free. Someone who has debt on an overdraft, a loan, a store card and a credit card will be making four payments per month and these are likely to be at the minimum amount. This means that you are only paying off a tiny bit each month and the rest is going on interest, so the light at the end of the tunnel when it comes to paying off those debts can seem a very long way away. If another sudden need for cash comes up, you could well end up with a further debt. It could then be a slippery slope to defaulting on one or all of those payments.

Consolidation through the means of homeowner or debt consolidation loans allows you to deal with just one creditor each month and make a single payment. This single-payment approach will allow you to better budget for your monthly outgoings. You will know exactly how much money will leave your account on each day of the month. You can then sit down and draw up a list of the amount of money you have available and the things that you need for the month, safe in the knowledge that there won’t be any unexpected surprises when it comes to your repayments.

There is also the psychological motivation associated with a single loan to consolidate your debts. When you consolidate, the lender will tell you how much you have to pay per month and for how many months. This will give you a very clear idea about the day when you will completely pay off that loan. This is a massive motivator to keep up your repayments and not get into more debt. You can even mark on the calendar the date when you will no longer be paying out towards debts each month. Think how much money you will then be able to save, or even just spend on enjoying yourself without having to worry.

The other idea of debt consolidation is that, in total, you end up paying less interest. You should find a loan at a lower rate than your existing credit, ensuring that you are not paying over the odds for the simplicity of a single payment. Monthly repayments could be reduced through this alone, but by spreading out the repayments over a longer time period, you can further reduce the amount that you will be required to pay each month.