Credit Myth: Having minimal credit will help your credit score

Many people believe that the pathway to great credit is to not have much of
it.  Unfortunately, this lack of credit can have the opposite effect.  Credit scores are numerical predictors of how likely a borrower is to default on a loan.  They are designed to measure how well a borrower manages credit, not how little of it they have or how quickly they can eliminate it.

Having fewer credit accounts leaves a person with less room for error.  35% of a one’s credit score is based on their payment history.  As an over-simplified example, let’s say a borrower makes a late payment to one of four creditors because of something unexpected in life.¹  This can have a much smaller negative impact on their credit score than someone who makes a late payment to the one and only credit account they have².  One borrower was late on 25% of their accounts while the other was late on 100% of their accounts.

I recently met with a potential client who had really low credit scores³.  The negative information was many years old.  They had gotten “burned” by having credit and they vowed to avoid it.  The really low credit scores⁴ remained low because they had failed to build any new, healthy credit since the negative items were reported.

Can a person get a mortgage without credit?⁵  Yes.  They can demonstrate responsibility by documenting the payment of other bills regularly on time, like utilities.  But, they will pay a premium for it.  Documenting credit worthiness through non-traditional means generally requires more money from the borrower to process the loan.  It also usually results in a higher interest rate on the loan because the loan is outside the norm for a large lender or the loan is through a smaller lender whose rates are less competitive.

A borrower’s credit score is improved and strengthened by demonstrating they can effectively manage a variety of credit types over time.  Are you organized and responsible enough to pay your bills on time?  A lender doesn’t know you are unless you’ve done it, and they don’t know you’ve done it unless your credit report says so.

1. And they happen to the best of us.
2. The type of accounts does matter, that’s why I said it was an “oversimplified” example.
3. You don’t want to know.
4. No, I’m really not going to tell you.
5. This is referring to no credit resulting in no scores, not poor credit resulting in low scores.

Building relationships with our clients to provide successful home ownerships.