If you owe money, your credit rating is extremely important because it can offer a way for you to get out of debt. If your credit rating is good, you'll find it easier to refinance your debt at a lower rate of interest. This will reduce the size of your monthly debt repayments, leaving you more money to pay of your debts in a shorter period of time.



But many people don't fully understand how the credit rating system operates. And the number of credit myths that exist make it even harder to know what does and does not affect your credit rating. So here's a selection of the biggest credit myths, the truth behind them and the steps that you can take to improve your credit rating.

Credit Myth 4: People Living At Your Address Can Harm Your Credit Rating

This is more of a misunderstanding than a myth. In the past, lenders routinely checked the credit reports of other people living at your address. Their findings were often taken into account when deciding whether to accept a loan application.

In many countries, that practice has now ended. However, credit reports still contain details of your financial associates (for example, people that you share a joint mortgage or bank account with).

This info is used by lenders to check out the creditworthiness of your financial partners. This may or may not be people who live at your address. And if they have a poor credit record it may harm your chances of being granted a loan despite the quality of your credit record.

If you want to avoid any potential problems, check the list of financial associates on your own credit record. Check that the information is current and correct. Dispute any inaccuracies. And make sure that your financial associates check their records and correct any mistakes before you submit your credit application.

Credit Myth 5: Previous Debts Don't Matter

Oh yes they do. The aim of a credit report is to provide lenders with a detailed picture of your financial history over recent years. So if you've defaulted on various debts and had court judgements entered against your name, your credit record will be poor and most lenders will turn you away. And this applies even if your financial history has improved greatly over recent years.

As a general rule, missed loan repayments will remain on your credit report for three years. Court judgements will last for six years and the evidence of bankruptcy can last for anything up to 15 years. Of course these limits will vary from country to country, but as a general rule, the worst your financial history, the longer it will take to escape from the effects of it.

However, even if your credit record is poor, there are various steps that you can take to improve the situation. In most cases it's possible to add a note of explanation to your credit report. This will allow you to make potential lenders aware of the circumstances surrounding your previous credit problems. For example, if you missed a couple of mortgage repayments due to illness or redundancy, many lenders will take this into account when assessing a loan application.

Apart from that, the best way to improve your credit record is to pay off any old debts and continue to service your current debts making each monthly repayment in full and on time.

Credit Myth 6: One Person Can Only Have One Credit Rating

This rather subtle credit myth is perfectly understandable. And to an extent it is true. In general, one person can only have one credit report (unless you consider the credit rating that a person's business can have, but let's not complicate things), but it can be interpreted in a range of ways by different lenders depending upon your circumstances at the time.

For a start every lender has their own credit score formula that they use to interpret the details in your credit report. Lender will also used different criteria for determining your eligibility for different types of loan, for example, mortgages, personal loans, store cards and credit cards. So while a couple of missed mortgage repayments may dent your credit score with most mortgage lenders, it may not have such a dramatic effect on your application for a store card.