Credit Ratings

Credit Clinic – Part 6

credit clinic part 6

Experian expert, Joe Green, answers your credit-related questions

Shopping around
I have recently approached my own bank, an independent financial mortgage advisor and a couple of building societies to try and get the best possible mortgage deal, as I plan to buy my first property. My parents have told me that I might have made a mistake in going to so many different people as they may all have done credit checks and this could hurt my credit rating. I haven’t actually taken out a mortgage yet, but I am now very worried and I not sure what to do.
Ben Byrne

Shopping around is definitely the right thing to do before you commit to a mortgage deal and I’d certainly encourage anyone to do this as finding the best deal may save you money in the long run. The essential thing you need to be conscious of is that for a quote, a lender will generally ask your permission to conduct a soft search, while for an agreement in principle, the lender will request your permission to do a hard search, which will be visible to other lenders on your credit report. As long as you’re looking for quotes from each of the lenders, this won’t affect your credit rating so you should have nothing to worry about.
Before committing to a mortgage deal, you need to get yourself in to the best possible position, so take some time to understand your current position by checking your credit report and then you can start taking some steps to ensure it is in the best shape to support your application. I think you might find it useful to check out our Experian Guide to Mortgage Applications, which can be found on our website at Experian.co.uk/Improve.
Credit card dilemma
I am trying to save for a deposit on my first home. I have a credit card, but I know that sometimes I can get rather carried away and buy things using it, which I really don’t need and can’t afford. Because I can’t trust myself, I think the best idea would be to close it, but a friend told me that this could seriously damage my credit rating. She suggested that I don’t close it, but instead just cut it the card so I can’t use it. Can you advise me what the best solution would be?
Fleur Turner

Given that you’re planning to apply for a mortgage, it’s really important to get your finances in check. Losing control of your finances could not only negatively impact your credit rating, but could also impact how a lender makes their decisions around affordability. Since the introduction of the Mortgage Market Review a couple of years back, lenders now have to abide by strict affordability rules when giving mortgages. This means they’re likely to scrutinise your monthly income and outgoings with a fine-toothed comb to make sure you can afford your monthly mortgage repayments, both now, and if interest rates were to rise. If you can’t pay back what you spend on your card, then I’d advise you don’t spend it. Given you say you don’t trust yourself, I’d listen to your friend, pay off everything you owe and cut up the card. You could consider leaving the account open, though, as it is likely that it will help your credit rating – especially if you have managed this credit card well in the past, ensuring that you have made payments on time and kept within the agreed limits.
Lenders not only like to see a positive track record of responsible credit management, but some will also look at your credit utilisation – which is another way of saying how much you are using of the credit available to you. After you’ve paid off the remaining balance your utilisation will be 0%, so this is likely to be seen as a positive for credit scoring. We’d usually recommend using no more than 50% of your credit limit, so owing nothing will do no harm to your mortgage application.
Soft search
I am a first time buyer and I am nearly ready to hopefully buy my first home.  I recently had to buy a new laptop as my one was broken and I need it for work. The shop that I bought it from was offering interest-free credit, so, as it was expensive, I decided to go for this option. When setting up the agreement they told me that they had done a soft search of my credit rating, but this would not affect me in any way. I have never heard of this and wondered if you could explain what it is and also confirm that it will not be detrimental when I come to try and a get mortgage.
Will Matson

It seems unusual that the company you bought your laptop from only opted to do a soft search before offering you a credit agreement. Soft searches are generally used by lenders when providing a quote, or eligibility rating, that gives an indication of whether you might be successful applying for credit and what rate you’re likely to be given. This type of search just looks at key information in your credit report, and doesn’t leave a ‘footprint’ that other lenders can see. When you make an application for credit, like buying the laptop in your case, the lender will usually carry out a full credit check, which will leave a footprint visible to other lenders. It’s unusual for lenders to make a decision based purely on a soft search, as it doesn’t give a full picture of how someone manages their credit.
To confirm what type of credit check the lender has done, I’d recommend getting a copy of your credit report to see how this has been recorded. Check all three credit reference agencies to be sure. I would delay making your mortgage application until you know exactly what has been recorded on your credit report. Making several applications for credit over a short period of time can influence a lender’s decision, so if a hard search has been recorded, it could be worth holding off by a couple of months before you apply for credit again.

If you want help understanding how credit referencing works and how to improve your Experian credit score, visit experian.co.uk/improve

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