No debt – no credit?

One of the difficulties with credit is that it’s hard to get it until you’ve had it. For any bank to lend you large sums of money, it needs to see that you’ve been responsible with credit before. This does sound a bit impossible, but usually what it means is that in order to qualify for a big loan such as car or home finance, you’ll need to have shown that you can handle smaller sums. This could be in the form of store credit, credit cards or personal loans.

But what if you’ve been highly responsible and never gotten yourself into any sort of debt at all? Will banks still be able to judge your credit-worthiness?

A credit rating is a rating or a score reflecting how you as an individual are handling the responsibility of credit. Credit ratings are reflective of past payment behaviour. If you have not taken up any credit in the past, there will not be any information available to allow companies to determine a credit score for you. So banks won’t be able to rate you if they have nothing to go on.

In such an instance the bank would have to approach the granting of the loan on a fairly conservative basis and may require the customer to put down a deposit and the bank may also not be prepared to grant a home loan unless the customer has an account with that bank into which their salary is being deposited so that the bank has full visibility of transactional behaviour.

Your primary bank is normally in the privileged situation where they have behavioural information on your cheque and savings accounts which can tell them a lot on how you are handling some of your financial responsibilities. In the case where you do not have a relationship with the bank there would be an individual assessment on a case by case basis as to whether or not the bank is prepared to enter into a credit relationship with you.

Credit cards for scoring (Photo credit: Wikipedia)

Nevertheless, having a credit rating will certainly make it more likely that you will have an application for a home loan approved. It will also allow you to apply to banks other than your own. So it may be a good idea to build up some sort of track record, even if only with very small credit limits. These could be on a credit card, an overdraft or preferably both. Credit cards are actually the best way of earning a score, because just having one means that you will have a credit rating on the bureaux, even if you never use it. You will however earn a better score if you do make purchases on it and pay off the balance every month.

The longer the period is that the client has demonstrated that they can responsibly use credit the better their credit score will be. Having a credit card for example and not using the limit demonstrates to some extent to the bank that the client can manage their affairs prudently.

Importantly, though, there are other ways to build up a credit score. Cell phone contracts and paying rent, for instance, are reported to credit bureaux, so if you have a contract that you pay every month that will reflect as a positive on your score.

But what you certainly shouldn’t do if you’re thinking of applying for a home loan is to rush out and take all sorts of new credit in an attempt to get a score. Keep in mind that it does not look good if you have opened up a lot of credit facilities within a short period of time. This might indicate that you are experiencing some form of distress and may also negatively impact your credit rating.

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