Why is your credit rating worse if you don't have a mortgage?

can_darter

This seems odd to me - I appreciate having a mortgage shows you can pay off debts, but it's odd that having one increases your credit score when a lot of mortgages are such a large debt?

DullGreyGuy

can_darter said:

This seems odd to me - I appreciate having a mortgage shows you can pay off debts, but it's odd that having one increases your credit score when a lot of mortgages are such a large debt?

What are you comparing it to? A renter? Someone who's paid off their mortgage?

Whose "score" are you considering? The actual decision mechanism used by RBS on if to give you a loan or the made up numbers sold to you by the CRAs?

ButterCheese

It's about risk to a certain extent.  If you have a mortgage, credit card, phone contract or anything,  and are paying it off, then you are proving that you can pay it off on time.  This is a way to earn brownie points, so your credit score goes up.

Someone without a mortgage might have very sparse data on how they repay stuff, if they do at all.  So basically if I lend you a huge amount for a house, and you are repaying it, you earn my trust and therefore points.  If you never borrow from me, then I have no idea about your income, how trustworthy you are, and how well you manage your money.  So no points for you.

Our eldest son, now 20, has never had a contract in his name despite having a well paid job and no debt.  Yet he can't even get a phone contract in his own name due to poor credit score.  He managed to get a credit card, paid off in full by DD every month, purely to increase his credit score

Nasqueron

ButterCheese said:

It's about risk to a certain extent.  If you have a mortgage, credit card, phone contract or anything,  and are paying it off, then you are proving that you can pay it off on time.  This is a way to earn brownie points, so your credit score goes up.

Someone without a mortgage might have very sparse data on how they repay stuff, if they do at all.  So basically if I lend you a huge amount for a house, and you are repaying it, you earn my trust and therefore points.  If you never borrow from me, then I have no idea about your income, how trustworthy you are, and how well you manage your money.  So no points for you.

Our eldest son, now 20, has never had a contract in his name despite having a well paid job and no debt.  Yet he can't even get a phone contract in his own name due to poor credit score.  He managed to get a credit card, paid off in full by DD every month, purely to increase his credit score

Just so you are aware, getting a card to change the score is pointless as nobody but you ever sees it, lenders do not use it, they don't even see the number you see, they have their own scoring systems.

@can_darter you can ignore the nonsense score, it's a pointless gimmick

Emmia

Nasqueron said:

ButterCheese said:

It's about risk to a certain extent.  If you have a mortgage, credit card, phone contract or anything,  and are paying it off, then you are proving that you can pay it off on time.  This is a way to earn brownie points, so your credit score goes up.

Someone without a mortgage might have very sparse data on how they repay stuff, if they do at all.  So basically if I lend you a huge amount for a house, and you are repaying it, you earn my trust and therefore points.  If you never borrow from me, then I have no idea about your income, how trustworthy you are, and how well you manage your money.  So no points for you.

Our eldest son, now 20, has never had a contract in his name despite having a well paid job and no debt.  Yet he can't even get a phone contract in his own name due to poor credit score.  He managed to get a credit card, paid off in full by DD every month, purely to increase his credit score

Just so you are aware, getting a card to change the score is pointless as nobody but you ever sees it, lenders do not use it, they don't even see the number you see, they have their own scoring systems.

@can_darter you can ignore the nonsense score, it's a pointless gimmick

I agree on the meaninglessness of the score.  What the card will do though is to fatten his credit file and provide evidence that he pays his debts on time - which is what lenders look at. 

One of my friends took out a card to boost his file before looking to buy a house. He swapped his gym membership and his netflix subscription onto the card and then set up a direct debit to pay the bill. The card is used for nothing else.

ButterCheese

Nasqueron said:

Just so you are aware, getting a card to change the score is pointless as nobody but you ever sees it, lenders do not use it, they don't even see the number you see, they have their own scoring systems.

@can_darter you can ignore the nonsense score, it's a pointless gimmick

If the lenders have their own scoring systems then surely these can only be scored if you borrow from them, not if you borrow from another lender?  So how does it work if you have only built a score with Vodafone and you then try to borrow from Barclays?

Emmia

ButterCheese said:

Nasqueron said:

Just so you are aware, getting a card to change the score is pointless as nobody but you ever sees it, lenders do not use it, they don't even see the number you see, they have their own scoring systems.

@can_darter you can ignore the nonsense score, it's a pointless gimmick

If the lenders have their own scoring systems then surely these can only be scored if you borrow from them, not if you borrow from another lender?  So how does it work if you have only built a score with Vodafone and you then try to borrow from Barclays?

Providers all report to the credit ratings agencies, so a new provider you want to use will look at the content of your file (not the score) to see how much borrowing you have i.e. number of credit cards / loans... And the limits / utilisation. Payment history over the last X period, financial links. etc. 

They'll also use their internal systems if they have data on you, which will be more detailed. 

If you've never looked at your whole credit file, it's worth doing to understand the data that is held and how it is recorded. 

Nasqueron

ButterCheese said:

Nasqueron said:

Just so you are aware, getting a card to change the score is pointless as nobody but you ever sees it, lenders do not use it, they don't even see the number you see, they have their own scoring systems.

@can_darter you can ignore the nonsense score, it's a pointless gimmick

If the lenders have their own scoring systems then surely these can only be scored if you borrow from them, not if you borrow from another lender?  So how does it work if you have only built a score with Vodafone and you then try to borrow from Barclays?

Lenders take the data on your file which is a central repository of information like credit cards, mobile contracts etc. You might build a reputation with Vodafone but they report back to the CRAs so Barclays can look at your credit history and make their decision based on whether Vodafone trust you and thus make a decision. The benefit of multiple types of credit is that it builds a better history and stronger/more in-depth file which makes lenders trust you more.

KittenChops

I would have thought that someone with a mortgage (when compared to someone without a mortgage), is more likely to be seen as less likely to disappear without paying their debts (as they presumably have equity in the property and ties to it)

Hoenir

KittenChops said:

I would have thought that someone with a mortgage (when compared to someone without a mortgage), is more likely to be seen as less likely to disappear without paying their debts (as they presumably have equity in the property and ties to it)

Someone that has reliably meet their financial obligations over a 72 month period has built up brownie points. Credit rating is only one factor in granting credit of any kind though. 

retiredbanker1

Historically if you had a mortgage you appeared to be more 'settled' and not do a midnight flit etc.
(Also t would be in your favour if you had a landline!)

Not sure its relevant anymore because rents today seem higher to me than mortgage repayments.