Credit scores can make or break a mortgage application

Whether you've been financially squeaky clean all your life or have had a few blips along the way, understanding the process of credit checks and credit scoring while obtaining your personal credit file can make the process of getting a mortgage far less stressful.

Your credit history might affect your mortgage options as some lenders only accept people whose credit history meets certain criteria. Because of this, it's important that anyone planning on buying a home gets their finances ready before applying for a mortgage and gets a copy of their credit report.

What is a credit check? 

When you want to take out a mortgage the lender will want to know that you will repay it. They will perform a credit check (also called a credit search), which means looking at information on your credit report with one or more of the credit reference agencies in the UK - Equifax, Experian and TransUnion. They do this to find out about your financial history in order to assess the risk of lending to you.

There are two forms of check, a 'hard search' which will leave a footprint on your credit file that will be visible to other companies and a 'soft search' which will be recorded but cannot be seen by others. 

What is a credit report?

During the credit check, the lender will access your credit report which will include your current and previous addresses, electoral roll information, credit agreements you already have such as overdrafts, loans or credit cards, and any missed or late payments on those, plus details of county court judgements (CCJs), bankruptcies or Individual Voluntary Arrangements (IVAs). The report will also show financial associates, which means anyone you have taken out a joint financial product with, such as a bank account, mortgage or loan. Employment history does not appear on a credit report, nor does any criminal record or medical issue.

It’s worth getting a copy of your credit report from all three main credit reference agencies if you’ve not applied for a mortgage before or if you’ve not checked your credit report for a while.

What is a credit score?

Each credit reference agency uses its own algorithm to convert the data on the report into a number, with higher numbers being considered safer when it comes to credit. For example, Experian gives people a score from 0-999 which categorises them into five bands of credit worthiness ranging from 0-560 (poor) up to 961-999 (excellent), although companies checking you only see your credit file, not the score compiled by the agency. Your score can go up and down, so you should check it regularly to monitor your financial health. 

Credit reference agencies make their credit scoring system available to members of the public, which allows borrowers to get an indication of their own creditworthiness. However, when it comes to a borrower applying for a mortgage, the lender they are applying to will use their own scoring methodology which may or may not be affected by the credit reference agency data.

Each lender has its own scorecard which will reflect the type of borrowers it lends to and their propensity to pay their debts on time and these scorecards have been developed using multiple data points including historical data from the lenders' own customer base.

What impacts a credit score?

Anything that may indicate you are not financially prudent will work against you – making late payments, defaulting or having CCJs, bankruptcy or Individual Voluntary Arrangements will be weighted negatively. Using payday loans or cash advances on credit cards can also count against you. Having a large amount of credit already such as multiple credit cards, loans or overdrafts will cause concern for some lenders.

Applying for a lot of credit in a short timeframe can also be a red flag which means if you have been turned down for a mortgage, frantically applying again with other lenders could mean digging yourself deeper into a hole, however unfair that seems.

Conversely, being 'invisible' can also hinder your ability to get a mortgage. People who don't have a financial track record to be properly scored, for instance, young people who have never accessed credit or those returning from a period overseas will have limited data in their credit report, meaning a lender will not be able to confidently make a judgement on their creditworthiness.

How long do problems show on a credit report?

If you’ve suffered a credit hiccup in the past, it’s likely to cause you issues for a while.

Major problems like bankruptcy, IVAs and CCJs or defaults (where an account has been closed because of non-payment) stay on your credit file for at least six years. Missed payments on debts will be visible for at least three years and credit applications will stay on there for a year, whether successful or not.

How to improve a poor credit score

It's a good idea to check your credit score well before you want to apply for a mortgage as it gives some opportunity to improve matters.

Firstly, check for mistakes - for example, your identity could have been stolen and someone has used your details to apply for credit and then default. If information is wrong, or is correct but there are mitigating circumstances, you can add a 'statement of dispute' or 'statement of excuse' to the credit report via each credit reference agency. If your score is being lowered because of a financial associate you are no longer involved with (an ex-partner for example) you can fill in a 'disassociation form' to make it clear that the relationship is over.

If your credit score is simply mediocre, then a few things could make a difference:

• 1. Getting on the electoral roll is usually an easy way to score points as this effectively proves where you live. You can register for the electoral roll via your local council or online at https://www.gov.uk/register-to-vote. 
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• 2. Set up direct debits for all your bills and credit card repayments to avoid late or missed payments. Pay in full each month if you possibly can.
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• 3. Try and keep your credit utilisation low, that is the percentage of your credit limit you are using. For example, if you have a limit of £4,000 and you’ve used £2,000 of that, your credit utilisation is 50%. Usually, a lower percentage will be looked upon favourably by lenders.
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• 4. If your problem is lack of credit history, consider a credit card that is designed for those with poor or no credit. Borrow a smallish amount each month and pay in full and you will begin to improve your score.

Not all lenders credit score

There is one very important issue to bear in mind, not all lenders use credit scoring.

Credit scoring is commonly used by lenders who are looking for an efficient way of making consistent credit decisions when processing large volumes of mortgage applications. But many specialist lenders prefer to rely on skilled underwriters to make lending decisions rather than automated scorecards.

Credit scoring tends to penalise certain types of borrower profile including those with minimal credit history, those who move house regularly, those who aren't on the voters roll, those with limited trading periods, those looking to work past state retirement age, and of course those with a history of impaired credit. Where specialist lenders excel is spending the time to understand the complete customer profile, asking questions to clarify vague or complex situations.

How we can help if you’ve failed a credit score

We work with clients who have had an application declined elsewhere. A common cause of frustration is that lenders are not allowed to divulge why an individual may have failed a credit score and this can make it difficult for brokers to quickly ascertain the reason for a failed application. Data protection rules forbid lenders from giving more than a suggestion that you should examine your credit report.

The key for us is to really understand your circumstances and financial position in order to place your application with the most appropriate lender. By examining your credit report, we will have a better understanding as to the reasons why an application has been rejected and what needs to be done to improve the chances of success. 

We have access to specialist lenders who assess cases differently. Some lenders will look at a potential borrower with difficult credit circumstances if these credit issues were a few years ago, others may be more accepting of more recent issues.

By fully understanding your personal situation, we will have more certainty as to whether you’ll fit the requirements of a lender and will have more confidence your application is likely to be accepted.

Get impartial advice

We provide impartial mortgage advice to clients based in Torbay, South Devon, Exeter and East Devon, West Dorset and Somerset. Please contact us for a free initial consultation.