This morning I was scrolling on LinkedIn and saw a post by another mortgage broker. He was describing a situation where a client of his was told by another broker to get a car loan to ‘build a credit file’. Which I had to read back again because it was a very unusual piece of advice. So today lets dive into credit files and building them up.
A credit file is a snapshot of the past 5 years of your borrowing – think personal loan, buy now pay later, credit cards, car loans, business loans, mortgages, overdrafts and more. The file shows when you applied for credit products, how often you’ve applied for them, if you have been making your repayments on time & the funds owing. Using all these factors it produces a single number – called a ‘credit score’.
Lenders use this number – referred to as a ‘credit score’ to assess how worthy you are as a customer and how likely you are to pay pay your loan. The higher the number the safer the bet you are. Typically the highest score you car get is 1,200. When lenders assess your credit score they typically want your score to be above 500. Anything less than this and you will either need to provide a sound explanation why your credit file is low OR use a lender who doesn’t rely on the credit report as heavily.
To build up your credit score you can take out a credit card or car loan (as we saw in the scenario above) and make your repayments on time. As you can meet your repayments on time your credit score will improve. HOWEVER, this is still not advisable as since you have a debt your borrowing power when you go for a mortgage will reduce which counters your goal.
There is good debt and bad debt. You credit score will improve at a higher rate when making enquiries for good debt and meeting those repayments compared to bad debt. Good debt is typically a mortgage whereas bad debt is personal loan, buy now pay later, payday loans & credit cards.
A misconception is that you need a credit score and need a good one to get a mortgage. This is a myth we see time and time again and simply not true. You don’t need a credit file or credit score to get a home loan. Lender’s would prefer someone with no credit file as opposed to a poor credit file. We frequently get those without any credit files mortgages. So if someone is telling you to get a credit card, car loan or personal loan for the sake of building a credit file it is simply not necessary & will also reduce your borrowing capacity as it is a debt.
Another misconception is that you need a great credit score to get a home loan on a great rate. This is also not true as there are many lenders who don’t rely on a credit file but rather on the person themselves.
In conclusion, yes the credit file is an important tool when getting a home loan. However it is not be all and end all. There is always a solution.
