The Role of Credit Checks In Loan and Mortgage Applications

Credit checks are an important part of the loan and mortgage application process in the UK. They help lenders to assess whether an applicant is a good risk to take and can afford to repay the loan.

In this blog post, we'll explore how credit checks affect loan and mortgage applications in the UK and what steps you can take to ensure your credit score is up to scratch. 

What are credit checks?

Lenders use credit checks to assess an applicant's creditworthiness and affordability. 

There are two types of credit checks: soft and hard. A soft credit check is where the lender only checks your basic details, such as your name and address. Soft credit checks are typically done when you first apply for a loan or mortgage. 

A hard credit check is when the lender carries out a more detailed check, which will leave a mark on your credit file. This is usually done when you're further along in the application process.

Lenders use different criteria to assess an applicant's creditworthiness, but some of the most important factors include:

• Your credit history: This includes information about any previous loans or lines of credit you've had, as well as whether you've made all of your repayments on time.

• Your current financial situation: The lender will want to know about your current income and outgoings, to make sure you can afford the loan or mortgage repayments.

• Your employment status: The lender will want to know if you're employed full-time, part-time or self-employed, as this can affect your ability to repay the loan.

Once the lender has carried out a credit check and assessed your affordability, they'll give you a decision on whether or not they're able to lend to you.

How credit checks impact loan and mortgage applications

Although credit checks help lenders assess an applicant's creditworthiness and ability to repay the debt, they can also have a negative impact on your chances of securing a loan or mortgage.

In some cases, a lender may decline an application outright if the applicant has poor credit. In other cases, the lender may offer a higher interest rate or less favourable terms to applicants with poor credit.

Either way, the end result is that it can be more difficult and expensive for people with bad credit to get loans and mortgages.

There are a few things that applicants can do to try to improve their chances of being approved for a loan or mortgage, despite having bad credit. 

• You can provide documentation showing you’ve made efforts to improve your credit score. 

• Find a cosigner with good credit who is willing and able to sign on to the loan agreement.

Regardless of these options, it's important to remember that having bad credit will still make it more difficult and expensive to get a loan or mortgage. Be prepared for this before you begin the application process.

What is a good credit rating?

Your credit score is made up of a number, usually between 0 - 1,000, which represents your creditworthiness. 

The three main credit reference agencies in the UK (TransUnion, Equifax, and Experian) each have their own credit scoring models but, in general, this is what a good credit score looks like:

• TransUnion: 604 or higher

• Equifax: 420 or higher

• Experian: 881 or higher

If you're not sure what your credit rating is, it's important to check before you apply for any credit. This way, you can be sure that you're giving yourself the best chance possible of being accepted.

Strategies to improve your credit rating

There are a number of strategies you can employ to improve your credit rating and make yourself a more attractive borrower to UK lenders. Some simple steps include:

• Checking your credit report regularly for errors and taking action to correct them

• Making all loan and credit card repayments on time and in full

• Keeping your credit utilisation low (i.e. not maxing out your credit cards)

• Only applying for new credit when you really need it and can afford the repayments

By following these tips, you can slowly but surely improve your credit rating and make yourself a more attractive proposition for UK lenders.

Conclusion

Credit checks are an important part of loan and mortgage applications in the UK. They help lenders to assess a borrower's risk level and decide whether they should be approved for a loan or mortgage.

Understanding the impact that credit checks have on such applications is essential if you want to increase your chances of being accepted. 

For information and support to aide you in achieving your financial goals Money Helper is a free service set up by the Government to help people make the most of their money. Click here if you would like to learn more about Money Helper and their services