SPECIAL FEATURE: The credit score con
Do credit scores actually mean anything? The answer is, if you’re applying for a mortgage – probably a lot less than you think.
We have customers come to us every day puzzled as to why they’ve been declined when their CRA score was deemed ‘excellent’, and other customers with scores of 300 or less who still get approved – it depends on the information showing on your credit reports, the amount of deposit available, and a whole manner of other criteria.
For most mortgage applicants CRA scores provide a rough indication of general creditworthiness, but aren’t much more than a clever marketing tool.
An obsession with credit scores has many people taking desperate measures reach 999 on the assumption that it will guarantee them the finance they need.
Often people are ill-advised to incur high charges borrowing on payday loans or high interest cards to show they have an active and well ran credit file, and most are reluctant to even apply in the fear that an unsuccessful application will ruin their score – even those without a credit history blemish hold their breath when they click submit on an application.
Adverts selling CRA credit scores often delude potential mortgage customers as being the yardstick for mortgage approval, and it’s perhaps time public opinion shifted into line with what lenders actually assess.
Yes, having an ‘excellent’ score is a good indication that there’s little wrong with your file, and a ‘low’ score that you may have some issues, but the actual number isn’t the be all and end all for actual credit decisions that many people think.
In fact, it’s an important point to note that some lenders don’t even use credit score models at all.
The truth is most mortgage lenders which do consider some form of credit score take little to no notice of the CRA scores at all – for years now, most lenders generate their own scores, each one using different information about you and interpreting it in their own way.
The lender scores more accurately reflect an applicants’ creditworthiness as they factor in relevant information that the CRA’s don’t have, such as income information, deposit levels, type and length of employment and loan-to-income ratios. Even the type of property can make a difference.
Lenders then reference account conduct data from the CRA and feed this all into their own scoring algorithm, deciding who should and shouldn’t be lent to based on their own changing appetite to lend and attitude to risk rather than a rigid, less informed, singular model offered by the CRAs.
This means that if the same customer with a CRA score of 750 has a 50% deposit and has been in their job for 10 years, the lender is able to deem them a better risk than with a 10% deposit and a new job, and therefore has more flexibility to approve them than having just a CRA score.
This goes some way to explaining why a borrower looking at their CRA score thinks they should be approved but get declined, or thinks they should be declined and get approved.
Ever had a client be approved for a decision in principle only to be declined when you proceed to full application? You’re not alone.
Those who have credit issues such as defaults, CCJs, or even a bankruptcy on their credit file can still have CRA and lender scores of 999, and we see a lot of head scratching by customers and their brokers as to why they are still declined.
The reason, as we know, is because credit score and lender policy are two separate things, and it’s certainly possible for someone to pass initial credit checks and gain a decision in principle to then be declined when underwriters notice something that doesn’t fit policy.
Every lender is different in what they do and don’t accept in terms of certain credit history issues, income types, property types, affordability limits and more.
Sadly, a lot of advisers fail to understand or ask about the situation in enough depth from the outset, they approach the wrong lenders and then true eligibility is only established when an underwriter gets the application, often after valuation fees are paid and other charges have been incurred.
This just highlights the importance of using the right adviser, especially if the situation is less straightforward.