CREDIT reports underpin much of your financial life, painting a picture of your past and current borrowing habits, and affecting how willing firms are to offer you credit.

Yet new research by The Money Advice Service (Mas), a Government-backed body, has found one in five of us admit to knowing nothing about them, harbouring some worrying misconceptions about what is included in one.

The misconceptions include 22 per cent of 2,000 people surveyed having no understanding of what a credit report is for, and one in six (15 per cent) thinking it is used to check whether someone has a criminal record.

In fact, a credit report is used by financial firms to help them decide whether or not to lend you money in the first place, then how much to let you borrow and sometimes how much interest to charge.

Basically, they can be the difference between you being offered a mortgage or not, or determine how expensive the debt on your shiny new credit card is going to be.

The term credit provider does not only apply to banks, building societies and credit card firms either, they can also apply to businesses such as mail order and mobile phone firms.

High levels of existing debt are likely to make all these companies more nervous about lending to you – and be warned, missed payments from financial arrangements such as personal loans and gas and electricity bills will stay on your file for six years.

As a result, nearly one in six (17 per cent) in the Mas survey said their credit rating has caused them financial problems in the past, such as having difficulty getting a phone contract or struggling to rent a house.

So what can you do about it?

One obvious way to improve your credit rating is to pay your bills on time, perhaps by setting up a direct debit.

You could additionally boost your credit rating by getting on the electoral register and by thinking about whether you use all of your credit cards.

For instance, having card accounts open that you never use can affect what lenders think, as does being tied into any joint form of credit, such as a bank account or a loan, with someone with a poor financial history.

Even if you have been wellbehaved with your wallet, it is still worth making sure there are no mistakes on your report and that no one has used your details to commit fraud, as you can challenge anything that is wrong.

If there is accurate information on your file that does not reflect your current circumstances, such as if you have had debt problems but are now back on track, you could think about asking for a notice of correction on your report. This is a short statement explaining what happened.

Equally, remember a good credit score does not guarantee that a firm will say yes, as different firms have different criteria.

  • Major credit reference firms include Experian, Equifax and Callcredit. MoneySaving Expert.com has a free-to-use tool which enables people to check the chances of being accepted, but unlike applying for a card, this process will not affect your credit rating. The tool is at moneysavingexpert.com/BTeligibility