How mortgage lenders assess your credit worthiness

Credit score, credit rating, credit profile, Experian CreditExpert, Equifax ClearScore, Callcredit Noddle, who’s who, which is which and why bother? Consultant mortgage broker Charlie London explains the part that these agencies play when lenders are assessing your mortgage application.

What is a credit score?

A credit score is a speculative number given by a credit reference agency, usually within a range of 300 to 850, which demonstrates (in their opinion) the likelihood of you paying back credit, (i.e. it is your risk factor). The score is based on your last six years’ personal credit history including payment record, amount of debt, length of credit, type of credit, amount of new credit. According to the agencies, the higher the score, the more likely you are to be offered credit.

There are three main agencies operating in the UK: Experian, Equifax and Callcredit, each of which use their own formula to generate your score which means that you’ll have more than one. And all the scores mean different things to different agencies and lenders which makes knowing what a good score is problematic.

The agencies tend to categorise the scores as Excellent, Good, Fair, Poor and Bad but lenders don’t take these categories into consideration when making a lending decision.

 

What is a credit report?

If you are 18 or more, your credit report is a profile of your personal credit history over the last six years. In includes information on mortgages, loans, overdrafts, credit and store cards, mobile phone contracts and sometimes, utilities. It will show how you have managed the credit, including if you have missed payments or defaulted on loans.

 

Will an excellent credit score guarantee your mortgage application is accepted?

In short, no! Every lender has their own criteria and way of scoring which you must meet for your application to be accepted. In fact, at the moment, only one lender uses an agency-generated credit score to determine whether they will lend to you and if so, what rate of interest you will be offered. An excellent score does not guarantee you will be accepted for a mortgage. Conversely, a poor credit score does not mean your mortgage application will be declined.

 

Whose credit score or credit report do mortgage lenders use?

Unhelpfully for prospective borrowers, while some lenders will use only one agency others may look at a combination of some or all of them. As mortgage brokers, it is our business to know how each lender operates so that we can steer our customers towards the most appropriate solution.

 

How do mortgage lenders use credit agencies?

Mortgage lenders use agencies only as an indicator of your credit worthiness to help them make a lending decision. Exactly what they look at and how they view it is not entirely clear but might include: 

  • What is the level of outstanding credit in relation to the limit on your credit cards?
  • How you have managed past credit? Did you make all the payments on time?
  • Do you always make the minimum monthly payment or do you make regular over-payments?
  • How often do you use an overdraft facility? How long have you had an overdraft? Have you ever exceeded your overdraft limit?
  • Have you been made bankrupt? Do you have any defaults, CCJ's, Individual Voluntary Arrangement or Debt Management Plan in place?

 

How can you improve your credit profile?

If you’re looking to get on the property ladder, move up the ladder or re-mortgage, there are some steps you can take to ensure you are in a good position prior to applying for finance.

  • Check your credit report with all three agencies. Ensure that there are no discrepancies, or items you don’t agree with. If there is, talk to the credit reference agency straight away.
  • Be aware of your expenditure prior to making the mortgage application. Putting a monthly budget in place and sticking to it. Always try to save and have a surplus at the end of each month.
  • Make sure you make all your payments on time. If you can, clear all credit card debt each month or pay more than the minimum payment.
  • Try not to increase your debt or borrowing prior to a mortgage applications and if you can, reduce it.

Remember that a good credit score does not mean that you will be a guaranteed mortgage but it does help. Equally, there are often mortgages available for those with less than perfect profiles but as you might expect, they will cost you more.

To discuss your options, do get in touch. I can be contacted directly on 01732 471 604 or call the main line on 0345 345 6788.


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