It’s well known that if you default on mortgage or other loan repayments that it will adversely affect your credit rating, but did you know that you could also have a diabolical credit rating by doing absolutely nothing wrong?
That’s right! Regardless of how affluent they are, anyone who has never applied for credit will automatically score poorly on a credit risk basis the first time they submit any credit application. That’s because there is no credit history recorded against that person. So, even a multi-millionaire who has never applied for a loan will have an ‘officially’ poor credit rating.
However, that’s not to say that a multi-millionaire in that position wouldn’t actually get credit; any financial institution worth their salt would override the credit score to secure such lucrative loan business. But, it does illustrate that credit ratings don’t show the full picture.
Indeed, the way that people have traditionally been assessed as a credit risk is based on what many experts believe to be old-fashioned notions. The biggest two being that people stay in jobs for many years and also that they don’t move house. Obviously, in 2008 neither of those two assumptions rings true; people frequently move jobs and homes as they progress up the career ladder or simply better themselves.
Consider the position of Prime Minister Gordon Brown. He has only been in his current job for less than six months and also recently moved house - to a property that he does not own! Under current credit rating assessments that would make the PM a bad credit risk, but no-one is seriously suggesting that he wouldn’t get a loan if he applied for one!
Similarly, people who may have a bad credit rating because of past indiscretions won’t automatically be turned down for a loan. Loans aren’t all offered at the same interest rate and financial institutions tend to lend at lower rates to those with higher credit scores, but they will also consider lending to those with poor credit ratings, unfortunately usually at a higher interest rate.
But, for loans that are secured on property or an asset, such as mortgages or
car finance, the credit rating tends to be less important in the overall lending decision than other factors such as the applicant’s ability to meet the monthly repayments. That is because in the case of secured loans the property or asset can be repossessed if the borrower ceases to pay. So, the risk to the borrower is minimised meaning that even those with a bad credit rating can still get a loan to buy a car, or even a house!
