The terms credit score and credit check are often used interchangeably by consumers, many of whom assume they mean the same thing. Yet understanding the key differences between a credit check and a credit score, as well as how they are used by mortgage lenders, is essential, particularly given the current challenges around affordability.
Borrowers have faced a tough time in recent years with higher interest rates, rising living costs and stagnant wages putting the squeeze on household finances.
This has led to some consumers accumulating debt or experiencing minor credit blips, which may have impacted on their credit score rating. In some cases, it may even result in a rejection by the mortgage lender.
This can present challenges for mortgage brokers as it is not always clear why an applicant may have been refused a mortgage. In some cases, the borrower themselves may also be unaware why they have been turned away by a lender.
Often, the applicant’s credit score may not actually be that bad, and the reason they were refused a mortgage is simply because their credit score falls below a lender’s preferred score for potential borrowers.
This is because some lenders use a credit scoring system between 0-999 to determine a borrowers’ suitability for lending, with the best score being 999. This can be impacted if there is no, or little outstanding credit and in cases where that credit hasn’t been paid on time, for example, the score will drop.
Lenders using a credit scoring system to determine borrower suitability for example, will also have a preferred score for potential borrowers, which means that if the client’s credit score is lower than this benchmark, they may not be successful in their mortgage application.
This means that if a lender has a credit scoring criteria of over 700, anyone applying for a mortgage with a credit score lower than 700 will be rejected straight away, even if there is nothing inherently wrong with their credit profile.
In contrast, lenders that use a credit checking approach to underwriting, like Darlington Building Society, will take a more detailed look into a client’s credit history, including information regarding past and present loans, credit and defaults to determine their suitability as a borrower.
Not only does this allow the lender to determine why the applicant has the credit score they do, it also helps them to understand the story behind that credit score and make an informed decision about their suitability as a borrower.
This can be a particularly beneficial approach in cases where the applicant has a minor credit blip for example, as well as in situations where the borrower may in fact, not have much credit history at all.
Someone that hasn’t been in the country very long for example, would have a very limited credit score profile, given that it is based on outstandings commitments and paying these commitments on time over a long period of time.
The same is true for a younger person that may have only recently been old enough to borrow money and does not have a long and detailed history of borrowing on credit cards, for example.
These groups of people often struggle to get lending from banks and building societies that credit score as they have a ratio of acceptance. However, lenders that credit search are not bothered about the score number, but more about the activity of how any lending they have is maintained.
Given the current struggles around affordability facing many borrowers, understanding which lenders credit check versus those that credit score could make all the difference when trying to secure a mortgage for your client.
While there will always be cases where an applicant may not actually be creditworthy, in the situations mentioned above, a lender that credit checks rather than credit scores could make all the difference as to whether or not a client’s mortgage application is actually successful.
