Why having a Perfect Credit Record can Work against you

According to conventional wisdom it is desirable for anyone who wishes to take out a mortgage or borrow money from a financial institution to maintain a first class credit record. According to theory financial institutions like to see a good credit record. It tells them that the borrower is financially secure and unlikely to default upon a loan. The traditional view is that a borrower with a good credit record has access to a wider range of loans at preferential rates compared to those available to a borrower with a weaker credit record. The reality is somewhat different.  

First review what is meant by a perfect credit score. Although there are many propriety ways of measuring credit score a perfect credit score usually implies that the borrower has a secure income and a low ratio of outstanding debts to income.  

This is all very well, but raises a paradox. What is a lender to make of a potential lender who has a very high credit score who has never borrowed any money The credit score alone does not tell whether this borrower will make prompt payments on the loan. Ironically, the payment pattern of a new, financially secure borrower is less certain than that of an established borrower who has a regular payment history.  

Modern lenders have become sophisticated in their lending, These financial institutions manage their lending behaviour according to the credit rating and claims paying ability of the borrower. The interest rate charged on the loan reflects the likelihood that the borrower might default. A borrower with a high credit score who is unlikely to default is rewarded with a low interest rate. A borrower with a dubious credit score who has a greater likelihood of default is obliged to pay a higher interest rate. By careful management of the default process, by chasing up late payments and being very careful in the pre-screening selection process sophisticated lenders can make more money from the lower rated borrower than from those with an excellent credit score.  

Credit management techniques are now so sophisticated that someone with a lower credit score may be able to borrow more capital than someone with an impeccable record.  

Modern lenders do not necessarily offer the widest range of loans at preferential terms to a lender who maintains an excellent credit record. The widest range of loans and the best terms are available to those with a very good, rather than excellent, credit rating.