Many borrowers get pretty frustrated when they learn that most mortgage and overdraft debts don’t actually help them to build their credit scores. Especially given the sheer size of the obligation associated with a mortgage, one would think that a perfect repayment history would be the kind of characteristic that a bank would want to record for future applications. However, the fact remains that most banks simply do not report the repayment histories of residential debt or small overdrafts to the credit bureau, even though they monitor the debts internally to be sure that payments are being made.
The main reason why it is that mortgages and overdrafts don’t build up a borrower’s credit score is simply because it costs money for the banks to file this information. From there, because the banks are not yet legally required to report this kind of debt, they prefer to save the money. The rationale behind this decision is then furthered by the thought that both mortgage and overdraft debts are arguably low risk products.
For an overdraft, the bank will usually issue the loan against a personal account that is receiving regular direct deposits into it anyways, meaning that the bank would realistically be able to simply take the customer’s pay cheque automatically at the end of the month if the borrower refused to repay (similarly to a payday loan). Combined with the small size of the loan, the bank simply can’t be bothered to report the obligation, because they will not generally even make much of a profit off of the account itself. From the bank’s perspective, an overdraft account is simply a favor being extended to customers with the intent of improving the business relationship with that customer.
With respect to a mortgage, banks will not generally report the debt on a credit bureau because of the relevant costs, and the general security of the loan. Firstly, because of the way in which the bank earns its profit on the loan over time through interest repayments, it is hard to justify the immediate cash outflow required to report the loan on the bureau. Essentially, the bank does not want to pay upfront for a reporting service when it will not earn its returns until much later on.
From there, because of the way in which the bank’s loan is then secured against a residential property, the rationale is that the risk of the loan is low enough to allow for the bank to forego reporting on the credit bureau because the borrower is motivated to repay the loan by the desire to maintain control of the collateral, whereas the motivation to repay an unsecured loan is to maintain a personal reputation for repayment. As such, the bank will only report a mortgage on the credit bureau when it is foreclosed upon, so as to make a legal record of the foreclosure for future notice, and if perhaps the loan is extended as revolving debt in the future.
Even though an overdraft and mortgage don’t report on a credit bureau, it is important to remember that the repayment of these loans is still important to maintain a strong borrowing relationship with the lending institution itself. Banks still keep track of the repayment history for these loans on their own books, and take their repayment into consideration for their own future borrowings.
This means that a customer with a strong history on their mortgage will actually receive preferential treatment going forward with the bank that holds the mortgage, because the bank respects the repayment history, and sees the customer as being profitable over the long term. Alternatively, if the bank notices that the customer has missed multiple payments on their mortgage, they will likely shy away from extending great deals of credit in the future, as a result of the sentiment that customer has demonstrated a tendency to ‘burn’ the bank on payments in the past.