Understanding the role of Credit agencies and how your credit score impacts your mortgage application can be really helpful in securing your property finance. Could improving your credit score increase your likelihood of sourcing a better rate?
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, demonstrating (in their opinion) the likelihood of potential borrowers paying back credit. In other words, the score assesses how likely you are to default on your mortgage. To work out a credit score, agencies will review your last six years’ personal credit history, including payment record, amount of debt, length of credit, type of credit, and the amount of new credit against your record. 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, and each of which uses its own formula to generate your score. With three different scores from each agency, knowing what makes a good score can be problematic, especially as each will mean something different to individual lenders.
The agencies tend to categorise the scores as ‘Excellent’, ‘Good’, ‘Fair’, ‘Poor’ and ‘Bad’, but lenders don’t consider these categories when making a lending decision.
What is a credit report, and what's included?
If you are over 18, 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?
Not necessarily. Each lender has its own criteria, which you must meet for your application to be accepted. An excellent score does not guarantee you will be accepted for a mortgage loan, and, 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 we can steer our customers towards the most appropriate solution.
How do mortgage lenders use credit reference agencies?
Lenders can be split into two categories when it comes to credit agencies: those who credit score, and those that credit reference. For the former, an algorithm will be built into their online application system, which draws the necessary information held by the credit agency, plus any further details about the application. Using this information, the algorithm then generates a score which either will or won’t meet the lenders minimum requirements. On the other hand, lenders that credit reference will pull the data from the agency to review and decide whether they want to proceed with the application. The key difference therefore being that, for those that credit reference, there is no system generated scoring.
You will find that you can fail a credit score with one lender, but then pass with another, the reason being each lender will view your credit profile slightly differently, and will have their individual benchmark for what they class as a pass. Some factors which may impact your score are:
- What is the level of outstanding credit in relation to the limit on your credit cards?
- What percentage of your credit lines are utilised?
- How have you 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?
- Your postcode, time spent at current address and, indeed, your actual address, age and employment type are also examples of things which can impact your score
How can you improve your credit profile?
If you’re looking to get on or move up the property ladder, or even 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 do this for you. Ensure there are no discrepancies, or items you disagree with. If there is, talk to the credit reference agency straight away.
- Be aware of your expenditure prior to making the mortgage application. You can get yourself into a better position by putting a monthly budget in place and sticking to it, and 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; if you can, reduce it.
Remember that a good credit score does not mean you will be guaranteed a 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. You can call one of our experienced brokers on 0345 345 6788, or submit an enquiry here.
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