Credit score – Does it really make a difference?

by | Friday 21st Jan 2022 | Mortgage Insights

Clients Credit score

Perhaps the oldest question in the book of mortgages, do I need a good credit score to get one? For years people have avoided getting a mortgage because of their ‘less than perfect’ credit score and hundreds of thousands of people have missed out on some perfect properties due to black and white mortgage lenders and inexperienced advisors. In this blog we are going to explore several things.

We are going to look at different types of credit issues that are common and not so common when people start struggling to get a mortgage on their own. We are going to look at different mortgage lenders stances and criteria around credit issues and, we are going to look at some of the benefits of speaking to an experienced and specialised mortgage broker, like Oportfolio to make sure you are credit ready.

What does it all mean?

So, what do we mean by credit risk? The Basel Committee on Banking Supervision define credit risk as ‘The potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms.’ Basically, anyone who has and continues to fail to meet credit commitment terms that they have already agreed like payment dates and amounts is a high risk or failing to meet any future ones.

Some of the most common types of credit commitments that people struggle to keep up with are loan payments (bank, building societies, pay day loans), credit cards, phone, and utility bills (water, gas, electric, internet) and finance commitments (cars, motorbikes, electronics, jewellery). Normally failing to keep up with these types of commitments goes through three stages. First you miss a payment, and it registers on your credit file as a missed payment and shows that you are behind on your commitment. Second, if you continue to miss payments and don’t catch up, the commitment will turn in to a default meaning that you have consistently failed to keep up with the payment and now the account has defaulted.

What is the worst case scenario?

Finally, in some cases the creditor (bank or lender) of the credit will take legal action and you may have to go to court to settle the dispute. Finally, if you are unable to settle your credit issues you can apply for two things, bankruptcy, or individual voluntary arrangements. A bankruptcy essentially clears any debt you owe however it seriously impacts your credit score, and you are often prohibited from securing any other credit against your name for several years or in some cases ever. An IVA is similar however it is often taken to avoid bankruptcy. With an IVA you often come to an arrangement with the persons that you owe money to, to pay them back in a specific way with specific terms agreed by all parties and legally binding.

With any of these scenarios they will register on your credit file which is an overview of all the credit commitments you have and have had in the past. You start your credit journey with a credit score which is normally a number out of 1000 or less depending on which credit score agency you use. The higher your credit score the less credit risk you are perceived to be.

The lower the score the higher risk you are. Each discrepancy you have with your existing credit commitments i.e., missed payments, defaults etc… will decrease your credit score. Therefore, if you have several defaulted accounts this will decrease your credit score and make you look like a credit risk to anyone who has access to your credit file. With a bankruptcy or an IVA, this will show up on your credit file as such for anyone to see and normally stays there for 6 – 10 years. What does all this mean when getting a mortgage?

What is the big bank’s stance?

Like any other credit, a mortgage is usually granted based on your income and outgoings and…. you’ve guessed it, your credit score! Most of the big-name high-street banks such as HSBC, Santander, Natwest, Nationwide etc. are strict with what they will and won’t allow in terms of credit issues. This is because they are large banks and rightly or wrongly, they can afford to pick and choose who they want to lend to and of course, they would prefer a customer who is less of a credit risk i.e., with a higher credit score.

Most high street banks will allow small, missed payments on things like phone bills or utility bills however missed payments on credit cards and loans are a big red flag for most banks and anything like outstanding defaults or a bankruptcy/IVA are a definite no. However, with things like defaults, if you pay them off and wait 3 years, they will normally clear from your credit file and often you will be able to approach some of the high street banks again. We would always recommend that with any credit issues you have either in the past or more recent, that you speak to a financial advisor and discuss with them the best route forward and how to rebuild your credit score.

But what about people who are not currently in the position to clear some old credit issues or perhaps have cleared defaults but want to buy their dream house before the credit file has cleared? That’s where some of the more niche and specialist lenders come in to play. You will find that some of the smaller banks and building societies are a lot more flexible with credit issues than the bigger banks and often their uniqueness with quirky scenarios is what they pride themselves on.

Specialist lenders

For example, a lot of lenders such as Leeds Building society, TSB, Pepper Money, Precise mortgages, The Mortgage Lender and Kensington all look at the overall merit of the case as well as credit score and credit issues. With someone like pepper money, you can have defaults and missed payments in the past to varying degrees. If your credit score hasn’t been impacted too much, the reason for the credit issues in the past is satisfactory and, as long as your mortgage application has been positioned and packaged well, you can get a mortgage offer in no time on a competitive rate.

Why use a mortgage advisor?

So why is speaking to a mortgage advisor like Oportfolio important? Oportfolio advisors are experts in mortgages and our focus is to make sure that everyone who needs it, gets our help. In 14 years of being a brokerage, we have helped hundreds of clients in different situations achieve their mortgage dreams because we know what the rules are, and we know the best route to go down. If you have had credit issues in the past, it is likely that you will struggle to just go directly to your bank and get a mortgage. With a mortgage advisor, they will carefully look at your credit file and assess what the issues are.

They will be able to give you bespoke tips and guidance on how to both fix your credit issues and prevent them from happening again. Many of the more specialist mortgage lenders we have mentioned above are only accessible through mortgage brokers so using a broker comes with a lot of perks. Being knowledgeable in the quirky specialist lenders is a huge advantage of using a mortgage broker like Oportfolio as they know exactly which lender will accept what credit issue and also the best way to package and present your application to display its merits. The las thing you want is to not be credit ready when you go for a mortgage so speak to one of our dedicated advisors to make sure you are in the best position possible.

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