What is a credit score and will it affect my chance of a mortgage?
In most instances, when you apply to borrow money or get credit on a purchase, the lender will carry out a credit score to decide how much of a risk it is to lend to you.
In theory, the better your credit score the better your chances of getting a mortgage, credit card or loan – and with lower interest rates.
A credit score may also affect whether you’re allowed to pay monthly for things like gas and electricity, insurance premiums or renting a house.
The lender will use outside firms to do this, usually Experian, Equifax and TransUnion. Most lenders share information about the credit they give people through these agencies and share information about a customer’s payment history.
They need to build up a picture of whether they can trust you to pay back the agreed amount at the agreed time.
When they carry out a credit check to get your rating/score these agencies look at your existing and previous borrowing and the way you have managed and paid back debt during the past six years – everything from your mortgage through to car loans, pay-monthly mail order catalogues, store cards, some utility accounts and your mobile phone contract. This applies to your current and previous addresses.
They also look at if you have a job, how long you have been in that job, how much you earn and if you are registered to vote on the electoral roll.
Most major lenders will not usually lend to anyone who has a poor history of late or missed payments or other factors during the past three years. For instance they will look at how much you owe, whether you make a lot of applications for credit, if you have county court judgements against you, bankruptcy, or have previously been refused credit.
So although a poor credit rating can make it harder to get a mortgage, it is up to the lender and forms just part of their assessment. Some take a sympathetic approach but usually at a price, through higher interest rates and fees.
With the top rating you’re likely to get the best deals on credit cards, loans and mortgages. With a good rating you’ll probably be accepted but the very best deals may reject you. Middle-ratings should be enough to get a product but with a low limit on what you can borrow.
Mortgage broking senior manager Ian Gibbons, of Nottingham Mortgage Services, said: “If a customer wants the best possible deal for them, it is important to keep up-to-date with all payments, including mobile phones and store cards.
“Lenders base their decision to lend on numerous factors, such as the value and condition of the property, the applicant’s income and the term of the mortgage, but they also take in to account the credit worthiness of the applicant. To assess this they carry out a credit check or credit score.
“Every item of credit you have is logged with a credit reference agency, and a lender can see if you are up to date with mortgage, loan, car finance and credit card payments.
“The search will show if the customer has late payments, arrears, defaults or even repossession orders. Or if they have entered into voluntary arrangements with creditors, have defaults or CCJs for unpaid utilities bills.”
Building up a good credit history by repaying on time and staying within credit limits can show lenders you are a responsible borrower.
Three main firms – Experian, Equifax and TransUnion – compile your credit reports and you can check direct with those companies to make sure it is correct via their own websites, where there is information on what to do if you think they’ve made a mistake.
For professional advice on mortgages, contact us on 0344 481 0013 or visit your local branch.