Credit score, credit rating, credit profile, Experian, Equifax and TransUnion, who’s who, which is which and why bother? Consultant mortgage broker, Deepinder Bhangoo, explains the part that these credit reporting agencies play when lenders are assessing your mortgage application.
What is a good credit score for a mortgage in the UK?
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 potential borrowers paying back credit, (i.e. it is your default risk factor). Credit scores are 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 TransUnion, 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 or credit file over the last six years. It includes information on mortgages and mortgage payments, 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 scoring system 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 loan. Conversely, a poor credit score does not mean your mortgage loan 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 reference agencies?
Mortgage lenders use agencies only as an indicator of your creditworthiness 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 credit 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. (There are some companies who will check all three for you.) 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 monthly payments and settle bills on time. If you can, clear all credit card debt each month or pay more than the minimum payment on credit card balances.
- Try not to increase your debt or borrowing prior to a mortgage application 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.
Article Updated: 08/04/2020