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Five credit myths

Five credit mythsMake sure you're not falling for these myths about borrowing and debt.

Only certain kinds of people have problems with debt

You might think that only people who overspend get into debt, or that debt problems only affect people with low incomes. In fact, there are lots of reasons that people get into debt. Some of them, like losing a job or being injured, could happen to anyone and can't always be prevented or predicted.

There is a positive side to this: just as anyone can get into trouble with debt, anyone can get help and advice to manage it. So don't hold back from getting advice because you think it's not for people like you.

Debt consolidation will solve your debt problems

Debt consolidation is when you take out a loan to cover your other debts, meaning that you only have one repayment to manage. It can also reduce your monthly payments, at the cost of increasing how much you pay back in total.

Althought debt consolidation can help in some situations, it's not a magic bullet. Try not to be swayed by adverts promising to fix your debt problems, and instead get independent advice.

You have a single credit rating

You might think of your credit rating as a single number held on file somewhere, but that's not how it works. In fact, every lender will use a different system to decide whether to lend to you. They'll make this decision based on:

  • Their past dealings with you
  • Data from a credit reference agency, including information about any court judgements or bankruptcies
  • Information shared by other banks and lenders
  • The information on your application form
  • Information from the fraud protection service CIFAS

Getting credit isn't just a matter of paying back your debts reliably. Generally, lenders are interested in how much money they can make out of you, not how responsible you are with debt. That could mean, for example, that if you always pay your credit card bill in full straight away, it's harder for you to apply for another credit card, because you don't make the company much money.

Student loans affect your credit rating

Information about your student loan will not go to credit ratings agencies or be shared with lenders.

However, you might be asked about your loan and repayments on an application form. Your repayments reduce your monthly income, so they could affect your ability to get a loan or mortgage. That said, if having a degree boosted your earnings in the first place then you'll be more able to borrow as a result.

There's a 'best way' to borrow money

If you need to borrow, the best way to do it depends on your circumstances, how much you need to borrow and what you need it for. There's no single best option.

To work out what is the best way to borrow in a particular situation, you need to think about:

  • How much borrowing the money will cost you overall
  • Whether you can afford to keep up with the repayments
  • What will happen if you struggle to keep up with the repayments

You should also think carefully about whether you really need to borrow and what the alternatives are.

However, in some situations there is one kind of borrowing that is almost always best. For example, it's very unlikely that a student loan wouldn't be the best way to borrow money to pay for university.

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