Understanding the fundamental differences between a credit score and a credit check and how they are used by mortgage lenders is a key part of the advisory process. Yet for many borrowers, these terms are considered to be the same thing and are often used interchangeably.
Yet the differences between credit scoring and credit checking when it comes to assessing affordability can be crucially important for borrowers when applying for a mortgage. This is particularly true in the current higher interest rate environment where budgets and household income are being stretched.
The last few years have been financially challenging for many people, some of whom may have run up debt or experienced minor defaults on credit or utility bill repayments which may have had an impact on their credit score rating.
In some cases, this may have been a one-off, while in others, it may have been a series of episodes or occurrences over a prolonged period of time. Either way, the so-called “blip” will have been noted on their credit profile and may have subsequently affected their ability to secure a mortgage at a later date.
Recently, we’ve seen an uptick in enquiries from brokers seeking help with clients who have been turned away by a mainstream lender because their credit score has meant they failed to meet their lending criteria or affordability requirements.
In many of these cases, the client’s credit score may not necessarily have been considered poor and it’s unclear why they have been rejected for a mortgage.
This can be both disheartening and confusing for both the borrower and the broker, which is why it’s crucial to understand which lenders use what credit-related processes as this can make all the difference to the client outcome.
For example, some lenders will use a credit scoring system to determine a borrowers’ suitability for lending, which is usually a single numerical grade between 0-999. If the client’s credit score is lower than the lender’s preferred score, they may not be successful in their mortgage application, despite the fact that they may actually have a good credit rating.
In contrast, a credit check is a more detailed look into a client’s credit history and contains information relating to past and present loans, credit and defaults. While a client’s credit score is determined by the details of the report, it doesn’t explain the reason for their rating, which is why lenders such as Loughborough Building Society conduct a credit check when individually underwriting each mortgage application.
Conducting a credit check, by taking a look at the customer’s credit profile, enables lenders to understand the story behind a client’s credit score and make an informed decision about their suitability as a borrower.
This is particularly important in those cases where a client may have defaulted on a payment due to injury, illness, unemployment, or a change in personal circumstances, as checking the credit profile can help the underwriter get a better understanding of exactly why the default occurred.
Another benefit of credit checking and tailored underwriting is that it’s consistent. In contrast, those lenders using a credit scoring approach may occasionally change their scoring model based on their appetite to lend, which is totally understandable, particularly in volatile and uncertain market conditions when controlling business volumes is a priority.
However, this approach can be confusing for brokers and borrowers as they are not privy to this information and will not often have a clear understanding as to why an application may have been declined.
Obviously, there may be cases where the client may not actually be deemed creditworthy in either scenario, but in situations where affordability is being stretched or the client has a history of adverse credit, a lender that credit checks rather than credit scores could prove to be the difference between the client failing or successfully securing a mortgage.
Ashley Pearson is head of intermediaries at Loughborough Building Society