"The computer says no..." the now infamous line touted by rude bank teller Carol, in Little Britain. Carol displays an extreme lack of interest in her customers' personal lives. For some people, Carol is a metaphor for impersonal "credit scoring".
Being declined for a credit card or loan might not be such a big deal, but being declined for a mortgage can have devastating consequences.
Credit scoring is a method of assessing risk used by lenders in their decision making process.
There are two aspects to credit scoring; the credit score itself and your credit history - both of these are linked.
Firstly, Credit Scoring takes the data you provide to the lender - and assigns points to each bit of information. The more points you get, the lower risk you are considered to be and the higher your credit score.
Secondly, your Credit History looks at all of the credit you have held for the last six years. A mortgage lender will refer to a Credit Reference Agency, such as Experian or Equifax, who are licensed to hold this information on us all.
By looking at your credit file, a lender can easily see how much you owe and how you have conducted yourself. This information is held for the past 6 years. So, late and missed credit card payment or loan payments may have an impact for years to come.
The Credit Reference Agencies also collate information about you from the Voters Roll and the County Courts. All of this information is fed into your mortgage application and will have an effect, on your overall credit score.
As part of our advice process, we carry out a full "Fact Find" when we meet a customer for the first time. This information is extremely important - using our knowledge and experience, we can normally tell where we feel a customer may have a problem.
A problem can exist even if a customer has had no missed payments or poor credit history - there are many aspects to a persons financial makeup that can affect a credit score.
Not all lenders credit scores are the same - some lenders are a lot more difficult to get a mortgage with than others. Some lenders don't use a credit score at all. If we feel one lender may reject you and another lender is likely to accept you - we will probably want to avoid the mortgage lender that is likely to reject you!
This may seem like commonsense - but it is very important commonsense often completely overlooked by customers looking to "shop around" for a mortgage themselves. How is a member of the public meant to know which lenders are likely to accept them and which are unlikely - they aren't. As brokers, it's something we have learnt over many years experience.
When approaching a mortgage lender directly, you are likely to be credit checked as part of the initial interview. A lender may offer to produce a Mortgage Certificate for you. Sounds great... but beware - a credit check is going to be carried out!
Each time a check is carried out, it leaves a record or "footprint" on your credit file. Too many of these checks can make it appear to other lenders that you are desperate and can result in you being turned down for credit. Don't let careless credit checks trample all over your credit file.
Our knowledge and experience helps avoid unnecessary credit checks. We aren't going to undertake a pointless check in the knowledge that the lender is unlikely to accept you. Yet, if you walk directly into a lenders branch and see a bank adviser - they only have their own products to offer you and are likely to undertake a credit check.
Beware of a mortgage lender undertaking checks without your knowledge, you have no way of knowing beforehand how likely they are to accept you - if you are just after a couple of quotes, there really is no need to have a credit check carried out.
At some point a credit score is going to be necessary. Near to the point that you are going to put an offer on a property, an estate agent may ask for a Mortgage Certificate to confirm that you are able to obtain a mortgage. This helps them to confirm to the seller that you are "proceedable".
Credit scoring is only the first hurdle - a professional mortgage broker will also look at the supporting evidence you are going to need to provide as part of the mortgage application process. We will advise where we feel a lender may have an issue with the supporting documents, helping to avoid calamities at a later stage.
My next article will look at the practical steps that can be taken to improve your credit score and also explore some of the myths credit scoring.
Oak Tree Mortgages are whole of market mortgage brokers and provide comprehensive professional advice to those considering taking out a mortgage. We can help guide you through the credit scoring maze and obtain a Mortgage Certificate should you require one.
