Why are credit scores downgraded without a mortgage
Discussion
A credit score is calculated based on how well you are able to service debt. If you don't have debt then they don't have enough information to work out the likelihood of you paying it back.
Also not sure how this would work in practice as many (most?) people these days pay off a mortgage every few years and take out a new one to take advantage of fixed rates. I've paid off 2 mortgages in the last 7 years yet still in the same house and still owe a fortune on it
Also not sure how this would work in practice as many (most?) people these days pay off a mortgage every few years and take out a new one to take advantage of fixed rates. I've paid off 2 mortgages in the last 7 years yet still in the same house and still owe a fortune on it
IanA2 said:
Seems daft to me that they do not appear to have a mechanism to bump up those who have paid off their mortgage.
Anybody know why they don't?
Thanks
Same reason my credit score increased after I got a credit card.Anybody know why they don't?
Thanks
They're trying to gauge your risk to lenders and they need data points to do that. By paying off a mortgage you've removed something they can measure you against.
In practical terms if you were to apply for another mortgage for a second home, for example, most lenders would look on it more favourably as your affordability would be better than if you still had another mortgage.
John87 said:
Also not sure how this would work in practice as many (most?) people these days pay off a mortgage every few years and take out a new one to take advantage of fixed rates. I've paid off 2 mortgages in the last 7 years yet still in the same house and still owe a fortune on it
Eh, what you describe is remortgaging to a new deal, not paying off a mortgage.Edited by skyebear on Wednesday 9th April 16:50
Credit score's are about how you handle credit.
If you don't have credit, your score drops.
The biggest, most important debt, that most people have is your mortgage. If you get a mortgage your score will usually increase. Having a mortgage shows responsibility, it shows that you value keeping the roof over your head. As a secured debt, it also gives increased traceability.
If you have no mortgage, especially if you are renting and not living in a house mortgage free, the concern is that you could run up a load of unsecured debt and then disappear without trace.........if you don't register on the electoral roll they will struggle to trace you.
If you have a mortgage and own a house then you aren't, usually, going anywhere quickly, plus there is an asset they could try and get a charge against in case of default. Hence your score will be higher and you are deemed a lower risk
Your credit file does not show savings, so you get no improved bump in your score for that.
Paying off loans early does not benefit the lender and the short amount of time of the loan on your file means that paying loans off early does not increase your 'score'.
If you don't have credit, your score drops.
The biggest, most important debt, that most people have is your mortgage. If you get a mortgage your score will usually increase. Having a mortgage shows responsibility, it shows that you value keeping the roof over your head. As a secured debt, it also gives increased traceability.
If you have no mortgage, especially if you are renting and not living in a house mortgage free, the concern is that you could run up a load of unsecured debt and then disappear without trace.........if you don't register on the electoral roll they will struggle to trace you.
If you have a mortgage and own a house then you aren't, usually, going anywhere quickly, plus there is an asset they could try and get a charge against in case of default. Hence your score will be higher and you are deemed a lower risk
Your credit file does not show savings, so you get no improved bump in your score for that.
Paying off loans early does not benefit the lender and the short amount of time of the loan on your file means that paying loans off early does not increase your 'score'.
Sarnie said:
Credit score's are about how you handle credit.
The biggest, most important debt, that most people have is your mortgage. If you get a mortgage your score will usually increase. Having a mortgage shows responsibility, it shows that you value keeping the roof over your head. As a secured debt, it also gives increased traceability.
.
And surely having held (several) mortgages and paying them all off, that demonstrates that you have responsibly handled credit.The biggest, most important debt, that most people have is your mortgage. If you get a mortgage your score will usually increase. Having a mortgage shows responsibility, it shows that you value keeping the roof over your head. As a secured debt, it also gives increased traceability.
.
Which is kind of my point....
IanA2 said:
And surely having held (several) mortgages and paying them all off, that demonstrates that you have responsibly handled credit.
Which is kind of my point....
No, you once you no longer have an active mortgage, your score drops and you are now back to being seen as a potential flight risk.....Which is kind of my point....
Dingu said:
It doesn’t really matter anyway. Lenders aren’t looking up the number you see on Experian or wherever really anyway, they are taking the underlying data and applying their own algorithms to determine who to lend to and at which rate.
You are correct, but their own acceptance algorithms are still similar to what the credit reference agencies use to produce a score for consumers......Sarnie said:
Dingu said:
It doesn’t really matter anyway. Lenders aren’t looking up the number you see on Experian or wherever really anyway, they are taking the underlying data and applying their own algorithms to determine who to lend to and at which rate.
You are correct, but their own acceptance algorithms are still similar to what the credit reference agencies use to produce a score for consumers......Lenders want borrowers who will pay off the loan over the whole term
They don't really want people who are going to pay things off early, costing them lots of admin for less interest earned.
If someone who's paid off their mortgage suddenly starts wanting to borrow hods of cash, that suggests something has changed and risks may be high.
Do people who've paid off their mortgages often struggle to get loans for sensible amounts?
They don't really want people who are going to pay things off early, costing them lots of admin for less interest earned.
If someone who's paid off their mortgage suddenly starts wanting to borrow hods of cash, that suggests something has changed and risks may be high.
Do people who've paid off their mortgages often struggle to get loans for sensible amounts?
When we initially went for a mortgage my other half could be included in the application. She had never use a credit card or even had a phone contract.
She had a work phone and was providing most of the deposit she had saved for years.
Mortgage broker told her you need to spend spend spend on a credit card and pay it off each month for at least 3 months.
Years ago when my mum paid her mortgage off she was happy and felt free but was then stuck with borrowing.
My dad had gone self employed and so credit score was really low.
The broker at the time said if they still had a mortgage he could have looked at borrowing more and just re mortgaging. By paying it off when you apply again they treat you like a brand new customer. The fact you paid it off makes no difference. Possibly even a negative when it comes to more lending.
She had a work phone and was providing most of the deposit she had saved for years.
Mortgage broker told her you need to spend spend spend on a credit card and pay it off each month for at least 3 months.
Years ago when my mum paid her mortgage off she was happy and felt free but was then stuck with borrowing.
My dad had gone self employed and so credit score was really low.
The broker at the time said if they still had a mortgage he could have looked at borrowing more and just re mortgaging. By paying it off when you apply again they treat you like a brand new customer. The fact you paid it off makes no difference. Possibly even a negative when it comes to more lending.
Edited by Aiminghigh123 on Thursday 10th April 09:38
OutInTheShed said:
Do people who've paid off their mortgages often struggle to get loans for sensible amounts?
To isolate this bit we haven't had a mortgage for quite some time and have had a couple of minor issuesWe were guaranteeing our son's rental property and failed the initial test as we couldn't demonstrate we were paying rent or a mortgage - this got sorted with a manual intervention but took days of back and forth
My wife has a new job that involves travel and entertaining so thought she'd change her credit card to one with better rewards but couldn't get anything like the same credit limit.
This is all probably due to the fact we'd just been off the credit radar for years as we certainly don't have anything negative.
LR90 said:
I’ve had the opposite experience.
I’ve never really had credit outside my mortgage. Never had a credit card. Never bought a car on finance. I’ve had a phone on contract but not for many years.
The result? My credit score is superb. It was no issue whatsoever buying a house. No one told me to get a credit card or anything like that. No issue at all.
Is it all smoke and mirrors?
Two different scenarios, though. You have a mortgage but use little to no other credit; your rating will be based on your repaying the mortgage.I’ve never really had credit outside my mortgage. Never had a credit card. Never bought a car on finance. I’ve had a phone on contract but not for many years.
The result? My credit score is superb. It was no issue whatsoever buying a house. No one told me to get a credit card or anything like that. No issue at all.
Is it all smoke and mirrors?
In the post you quoted, the woman used no forms of credit and was applying for a mortgage. There was no extant mortgage on which to assess credit worthiness.
LR90 said:
I’ve had the opposite experience.
I’ve never really had credit outside my mortgage. Never had a credit card. Never bought a car on finance. I’ve had a phone on contract but not for many years.
The result? My credit score is superb. It was no issue whatsoever buying a house. No one told me to get a credit card or anything like that. No issue at all.
Is it all smoke and mirrors?
It's not smoke and mirrors, you have a mortgage, which confirms that it helps you when you need to borrow money...... ergo when you don't have a mortgage, your "score" drops.I’ve never really had credit outside my mortgage. Never had a credit card. Never bought a car on finance. I’ve had a phone on contract but not for many years.
The result? My credit score is superb. It was no issue whatsoever buying a house. No one told me to get a credit card or anything like that. No issue at all.
Is it all smoke and mirrors?
Think it was Martin Lewis who said something like imagine there are 3 people who want to borrow £20 off you.
One has borrowed £10 before and paid it back on time - they would get the higher score, as are likely to pay it back in full and on time.
One has borrowed £10 before but didn't pay on time; eventually they paid it back late and with some installments - they get the lower score.
The third is new to the group - you have no way to know if they're good for it.
One has borrowed £10 before and paid it back on time - they would get the higher score, as are likely to pay it back in full and on time.
One has borrowed £10 before but didn't pay on time; eventually they paid it back late and with some installments - they get the lower score.
The third is new to the group - you have no way to know if they're good for it.
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