No credit is good credit. Think again

Posted by Ben Tumilty in Credit Check on 4 April 2016 - Ben is a Credit Analyst at checkmyfile

Picture this scenario. You go into a mobile phone shop to get the latest release on a contract. At £30 a month, it is well within your affordability, without pushing your monthly income too much. All in hand, you may think.

But you get declined, to your horror.“This has never happened before”, you say, “I’ve never had any debt”.

And therein may lie the problem; you don’t hold any credit cards or loans, you own your house as your mortgage has been paid (or you rent your house, so have no mortgage) and previous to this you used a pay-as-you-go phone.

In short, you’ve been of the mindset that if you don’t have the money to buy something, you’ve saved until you do, as opposed to paying on a credit card, or purchasing a car on finance. The result is that you do not owe any money to anyone.

You have no active credit, other than your current account. But unfortunately, many lenders will look to your active credit agreements to assess your creditworthiness and to ascertain how likely you are to meet repayments on time, based on your current and previous payment history.

They will also look for credit agreements you have held in the past 6 years, but if all you have are closed accounts then there is little or no record of your current credit activity, and thus makes it more difficult to judge your current situation.

This is not to say that every lender will decline you if you have little in the way of credit history. You may find it harder to obtain credit if this is the case, though. The average number of open accounts in the UK is 5-7. The more active accounts that you have showing a positive payment history, the better the reflection of your creditworthiness.

Active and responsible use of credit is seen in a positive light by prospective lenders, so demonstrating your ability to keep up with payments on multiple accounts would improve your credit score.

Having said this, we would not advise you to obtain credit that you neither want nor need for the sake of boosting your credit score. Regardless of how many accounts you hold it is essential that any accounts you do have are well-maintained.

It is worth bearing this in mind when you apply for credit – if you have little in the way of credit history, then a good way to improve your creditworthiness would be to register on the Electoral Roll, as this will show stability. But even individuals with excellent credit may be declined credit – there are no guarantees that anyone will be accepted for credit!

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