The financial world loves its jargon and acronyms. You can probably get through life without knowing what an ETF* or CDS* is, but knowing the difference between a credit score, credit check and credit history is important. In fact, it could make the difference between being able to get a mortgage to buy your first home, or being able to move to a larger property and being forced to stay put.
Let’s start by explaining the difference, then we’ll explain how they could affect your future.
Credit history
Your credit history is a summary of your financial history. It shows your balances and payment history for a variety of different types of debt, including information on your:
- Mortgages
- Credit cards
- Personal loans
- Car loans
- Overdrafts
It also contains information about any County Court Judgements (CCJs) or defaults you may have registered against you, by people or organisations you have failed to pay. As well as details of any bankruptcy proceedings brought against you or Individual Voluntary Arrangements (IVAs) you have entered in to.
Finally, your credit history also shows the organisations which have run a credit check on you. This is usually done when you apply for credit, such as a mortgage, credit card, or personal loan. Importantly though, your credit history doesn’t show whether the application was accepted or declined.
Each piece of information generally stays on your file for six years, after which it is removed.
Credit check
A credit check is simply a check of your credit history made by someone you have applied to borrow money from.
However, the lender’s decision, whether to accept or decline your application, is usually made following a credit score.
Credit score
Most mortgage lenders use a credit scoring system to, in part at least, decide whether to accept your application.
A credit score combines your credit history with a range of other information and allows a lender to assess the risk of accepting your application.
Every lender will have their own unique scoring system, tailored to their requirements. Therefore, two mortgage lenders, for example, will make different decisions on the same application. Consequently, if you are declined for a mortgage by one lender, it’s perfectly possible you might be accepted by another. However, prevention is better than cure and there are things you can do to improve your credit history and score.
Where to start?
Several different organisations provide access to your credit history, these include:
- Experian
- Check My File
- Equifax
- Noddle
Each provide a slightly different service, with the first three making a small charge. Noddle is free.
They may also provide a credit score. Be careful though, while this can be a useful indicator of your credit worthiness, each lender you apply to will have their own, unique, scoring system. It is that you need to pass if your application is to be successful.
Once you have checked your file, if it’s not as clean as it might be, you can set about taking steps to improve it.
Improving your credit history, and score, is so important we’ve produced an article explaining how to do this. It also explains more about each of the organisations we mentioned earlier.
Why does all this matter?
Your credit history, will ultimately dictate two things:
- Whether you get accepted for the credit, for example a mortgage, that you are applying for
- The deal you are offered. Those people with the best credit history, and score, will be rewarded with lower interest rates and consequently lower payments. Conversely, those people with poor histories, or scores, will be seen as posing a higher risk and penalised through higher interest rates and repayments
Back to mortgages.
Whether you are a first-time buyer, moving home, or a Buy to Let investor, there’s only one way to know for sure whether you will be approved for a mortgage; make an application.
Most people don’t know that this is possible to make an application before they have found the property they want to buy.
It is. And it’s called a Decision in Principle.
In fact, it’s logical that you only start house hunting when you know, for certain, that you can get a mortgage. We can make a Decision in Principle (DIP for short) application for you. The result will tell you:
- Whether you can get a mortgage
- The maximum amount you can borrow
- What the monthly repayments will be
Armed with your acceptance you can confidently go house hunting, demonstrating to estate agents and vendors alike, that you are in a position to proceed should they accept your offer.
If you would like to obtain a Decision in Principle please contact one of our independent mortgage advisers on 0800 612 8099 or complete our online enquiry form by clicking here.
*The answer, if you really want to know, is an Exchange Traded Find and Credit Default Swap.