23

I just used 'Clear Score' to find out my credit rating.

My score is higher than both the national and local averages, but there are 2 'negative' results shown.

Negative (2)

  • Your oldest active credit agreement is not very old

  • You have no active credit card accounts

Why are both of those considered Negatives?

  • 6
    "You gotta have credit to get credit" – SnakeDoc Jul 20 '16 at 18:12
48
  1. Creditworthiness is proven over time. The longer your track record of making payments on time, the more probable you will stick to credit agreements in future (or so the reasoning goes).

    Conversely, someone who has only just started applying for credit could be someone whose finances were previously stable but have now started to get into difficulty. Obviously this is not necessarily the case but it is one possible inference. This inference is strengthened when same person applies for further credit in a short space of time.

    Ultimately, what is considered positive is a stable credit record over a reasonable period of time, because it indicates you stick to payment schedules and don't suddenly need credit due to money problems.

  2. Credit card accounts are considered a good indicator of credit status because they imply what kind of borrower you are. Whereas many credit arrangements present a straightforward case of arrears / no arrears (e.g. think of a mobile phone account – either you pay your bill or you don't), with credit cards there is an element of flexibility in how much you borrow, and how much of that you repay. If you run up four figure monthly balances but clear them in full each month without fail, that is a good sign. If your average balance is increasing and you are paying on time but just the minimum amount, that is a potential flag.

    In other words, credit cards are of particular interest because they paint a more nuanced picture. Provided you use one responsibly, getting and using a credit card may improve your status with credit reference agencies.

  • 5
    I'd like to summarize or expound on your second point to help cement it in my mind. Is this a fair restatement: Credit cards give you a choice in how much and when to pay. How the borrower uses this flexibility measures their ability or willingness to promptly pay back what is owed. – Freiheit Jul 20 '16 at 16:19
  • 5
    Another risk to consider. When creating a fake identity for identity fraud, it would take years to create an identity with a long history. That is why people prefer to steal an identity, rather than create one. A short credit history could red-flag you as a fake identity. – Aron Jul 21 '16 at 2:30
  • I understand why using a credit card responsibly would be a positive, but would not having one at all be a positive as well? You don't need the credit at all, just use a debit card / cash / whatever's appropriate in your country. – Jorn Jul 21 '16 at 12:38
  • 4
    @Jorn Having worked in consumer finance, I can tell you that this is all about risk and probability. Do you think that most people who do not have credit cards, do so because they have cash? Or is it more likely because they lack the buying power or credit to have one? Credit score is a ranking of your "Probable Risk" to the company by way of ability and capacity to repay. – BrownRedHawk Jul 21 '16 at 16:19
  • @BrownRedHawk Here in the Netherlands, credit cards aren't all that common. The average consumer doesn't have one. So yeah, that's what I'd expect. I used to have one, but only because non-Dutch webshops often accept it as the only payment options. – Jorn Jul 21 '16 at 17:01
18

Consider that however high your credit score gets, there is a 'worst piece of it'.

The automated software will always report your 'weakest' two points, even if they are already at the top 0.0001% of everyone; that's just how it is coded.

  • Is there a reasoning behind why the software does that? Is it simply to show a pro/con list? Is it a driver to sell services, such as "no credit card" implies "go get a credit card!"? – Freiheit Jul 20 '16 at 16:18
  • 4
    Most people are rather interested on which behavioral change would help them most in getting a better score, so the top two are listed. I doubt there is any connection to 'get another credit card', as the organizations that provide credit scores are not in the business of selling credit cards. Their analysis is based on statistical prediction of repayment behavior, and its correlation with measurable attributes. – Aganju Jul 20 '16 at 16:30
  • 9
    Statistics show that people with more credit cards (than you) pay loans back with a higher success rate, that's all. It doesn't mean you personally become a better payer by getting another credit card - it just says statistically there is that correlation. – Aganju Jul 20 '16 at 16:31
  • 3
    @Aganju Actually, sometimes they are in the business of hawking credit cards. If you sign up for sites like Credit Karma and Credit Sesame you'll find them hawking credit based upon your credit report. (Which leads to the crazy situation that I have repeatedly gotten the suggestion of such-and-such a card to improve the flaw on my credit history--the "flaw" being the lack of any credit other than credit cards!) – Loren Pechtel Jul 20 '16 at 22:52
  • 5
    I use ClearScore as well. My latest report does not display any negative factors. The software therefore does not ALWAYS report your two 'weakest' points. – Virtual Anomaly Jul 21 '16 at 8:22
15

I'm going to give the succinct, plain language version of the answers:

1. Your oldest active credit agreement is not very old

You don't have much experience or history for me to base my analysis on -- how do I know I can trust you to pay back the money?

2. You have no active credit card accounts

Other people haven't trusted you with credit or you haven't trusted yourself with credit and there's no active good behavior of paying credit cards on time -- you want me to be the first one to go out on a limb and loan you money? How do I know I can trust you to pay back the money?

2

1. Your oldest active credit agreement is not very old

This is fairly straight forward. If you've not been exposed to borrowing for a reasonable length of time, people won't want to lend you money. They have no reason to have any confidence in your ability to repay them. As other said, it's pretty much a case of proving yourself by being good with credit over a period of time.

2. You have no active credit card accounts

Credit reference agencies have to consider a variety of factors for a variety of purposes. Notably, they will be used for credit cards, unsecured loans, mortgages, and secured loans such as vehicle finance applications. These all have varying types of customer, and some will be inherently more risky than others. For instance, someone with a mortgage on a home is far more likely to make payments because they would be homeless without, however someone with a finance agreement on a car is relatively less likely to make those payments because all they stand to lose is their car. Consider that the most fruitful information the lender will get is a score and some breakdown of how it's generated, it's a very general understanding of your history. For that reason, having a wide variety of credit is very important. A good variety of credit to have would be one secured loan (e.g car finance) to get started, as well as at least one revolving unsecured credit account (e.g a credit card), and later on in your "credit life" an unsecured fixed term loan (e.g a loan for something which has nothing secured against it).

I say the above reluctantly, because that's how I increased my credit score from 450 to 999 - first step was the car finance where in 3 months or so I changed from 450 to around 600, with a credit card I was approaching 900, and once I had an unsecured loan for 8 months I hit 999 - now I have all of the above plus a competitive mortgage and remain at 999. Whether each is mandatory to maintain 999 is debatable but based on personal experience, it seems reasonable.

  • 1
    FICO scores have an 850 maximum, as does the current Vantage score. What system goes to 999? – JTP - Apologise to Monica Jul 21 '16 at 13:08
  • 1
    Your Experian Credit Score is based on the information in your Experian Credit Report. It is a number between 0-999, with 999 being the best score you can get. help.creditexpert.co.uk/help/sv635/Credit_Score/… – Arluin Jul 21 '16 at 19:36
  • As above, Experian goes from 0-999 and is what my score was taken from, I believe Equifax do the same but cannot be sure. I feel like you're from the States, @JoeTaxpayer - which would explain why these systems (which I'm using here in the UK) might be lesser known to you. – XtrmJosh Jul 22 '16 at 10:11

Not the answer you're looking for? Browse other questions tagged or ask your own question.