Article by Kelly Luff - 8th March 2017

Less Than Perfect Credit Score When You Are Cash-Rich

You might tick all the boxes in terms of financial stability – you may have paid off your mortgage, own your own car outright and have a hefty savings and pension pot. So why is your credit score not 1000 out of 1000?

Are You a 'Low' or 'High' Credit Risk?

Credit scores are used by lenders to decide your ‘risk’ to them before they lend you money. So if you’ve got savings coming out of your ears, a good income and don’t owe anyone money, surely they’d deem you a low risk and all want to lend to you, right?

Unfortunately this isn’t always the case. Certainly, if you ask your bank for a loan and you’ve always banked and saved with them, they’ll be more than aware of your financial standing and reliability. The difficulty is when you decide to apply for what might be a more attractive offer and they then request your credit report to decide if you are a ‘good’ or ‘bad’ risk.

At this point, the lender will view your credit history for the last 6 years. This might include your credit card debt, mortgage, loans or mobile phone contract, along with other data such as Electoral Roll or court records.

What it doesn’t show is your bank balance (unless you are using your overdraft), your savings and ISAs or your pension pot. It also won’t show your mortgage if it’s been paid off and closed for more than 6 years.

So, we often hear from customers with a lot of money in the bank and a good salary, but an average credit score and they all ask the same question - why?

Put simply, because your credit score is based on how you manage your debt, you need to have debt on your credit report to show how you repay it. If there is nothing recorded on your credit file, there is nothing for the lender to base their assessment. And if they can’t see whether you are able to repay £15 a month for your mobile phone, how can they decide whether to risk you repaying them £1,200 a month on a mortgage?

You may only buy something if you can afford to pay in cash, and hate the thought of borrowing from banks, but this lack of credit utilisation can impact you when you do need to borrow money for something like a mortgage and that is often reflected in your credit score.

Lenders don't only use your credit report to accept or decline an application, so elements such as employment, homeownership and salary will often be taken into account, but when you check your credit score, these components won't have been used to calculate it.

How to Build & Maintain Your Credit History

Thin credit files tend to be the affliction of those at either the start or the end of the credit-using period of their lives. Whether you simply aren’t old enough to have built up a credit history, or no longer have the need to borrow because you are cash-rich, the same issues surrounding a lack of history can affect you.

For this reason, many consumers keep their toes dipped into the credit-using world. Whether it’s taking advantage of an interest free period offer on your sofa, or keeping a credit card ticking over by putting your petrol on it and paying it off every month, there are ways to keep using credit so that your credit report remains healthy.

These are ways in which credit can be utilised without it ever costing you an additional penny, so it may be worth making the most of these to ensure that there is something being reported each month. What isn’t recommended is taking any old credit out to build your history – borrowing using payday loans for instance can actually harm how lenders might judge you, as they cannot be sure that you are good at managing money if you use short-term credit.

Having some credit accounts reported each month certainly helps to build your credit history (as long as you ensure you repay on time), and making sure that you stay on the Electoral Roll can also help to keep your credit score in good shape.

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