Beware the Curse of Associated Credit
This year, I’ve had a number of cases where clients have looked to add partners, spouses or even children on to their mortgages, usually for a variety of reasons. In the case of Buy to Let (BTL) applications, it’s often to spread tax liability (which is a whole different story!). In regards to residential applications, it could be to give their children the opportunity to build up a credit profile. Whilst there’s nothing inherently wrong with these approaches, what my past experiences have highlighted is that people are often very unaware of their own credit standing and scores – and the impacts of this can be significant.
For example, a client of mine had bought half a dozen properties on BTL mortgages. On the advice of his accountants, he was advised to buy them jointly with his partner, as they earn under the higher rate tax threshold. The accountant would then use this to reduce their tax bill in the years to follow. The client passed me his partner’s details and we submitted a number of new, joint applications alongside an application in sole names. During the process, it came to light that the second applicant had accrued some bad credit from a payment dispute over three years ago and, as a result, both cases were declined. In addition, they would not allow any further applications from the original applicant on the basis that they share a household and have a financial connection (called associated credit), such as a joint bank account, with someone who does not meet their strict credit criteria. From my experience, almost all lenders will decide to do this.
In today’s heavily regulated and cautious market, there are many circumstances that could be considered adverse to a lender, and produce the same result as outlined above. More often than not, the client may not even know they have these on their report, or if they do, how seriously they are taken. ‘Adverse’ used to mean very serious credit problems, such as where a client is taken to court and ordered to pay outstanding money, also known as County Court Judgements (CCJs). There is also Individual Voluntary Agreements, or IVAs, where someone in very large amounts of unsecured debt can have some written off in exchange for bankruptcy-like conditions, and a repayment plan is put in place for the remainder. Then there is Bankruptcy, where the client is stopped from getting any kind of finance.
In the past, missed and default payments were tolerated depending on their size, severity and how long it was since they occurred. Today, these kind of issues can stop you in your tracks for up to six years. Missed payments are fairly self-explanatory: this is where one, two or three months are missed on a repayment arrangement. Getting slightly out of sync could seem like a minor indiscretion but, on a credit report, are considered more severe. Imagine you have a credit card bill set up for payment via direct debit. You get paid on the first of the month yet, because of the date the card was opened, your payment due date was the twenty-fifth. Each month you get a bill due to be paid on the twenty-fifth, however each month that direct debit bounces. A letter is issued from the card company, taking a week to arrive at your door, in which time you have been paid and the bank have reattempted the direct debit successfully. It’s quite possible that the card company reports a late payment every month this happens, and will show as a string of ‘1s’ on your credit profile. For you, it’s a simple administration error on your part but, to a third party looking at your credit report, it looks like you just didn’t pay your bill on time. If you are late regularly on a £50 credit card bill, are you going to do the same for a £700 mortgage payment? If you get further out of sync, for instance if you cannot settle the commitment that month and it rolls over to the next, that ‘1’ becomes a ‘2’. It is recorded on your credit profile that you were two months late for as long as it takes you to get caught up. Defaults on the other hand are more serious. These are when a lender has not received the expected commitment for four consecutive months and they have subsequently declared the account in default. This means they can now take extra steps to recover the money and may involve a collections team at this point. You would be called, letters would be sent, solicitors and debt collection agencies would get involved and, ultimately, CCJs would take place.
One of the main aims of this article is to encourage anyone who is thinking about borrowing that hasn’t already to order a copy of their credit report to see how it looks from the other side. I guarantee there will be things you don’t recognise, things you disagree with or even items missing that you think should be on there. Either way, knowing how your financial profile looks, when reduced down to a series of ‘0’s, (hopefully!) ‘1’s or ‘2’s, will allow you to ensure that you don’t lose time and money applying for mortgages that might not go through. It is also useful when dealing with situations such as payment disputes, automatic billing and payment dates without inadvertently affecting your credit score. You can order your reports from the three main credit reference agencies operating in the UK; Experian, Equifax and CallCredit. Each has an option to order the score for a nominal £2 charge. Most will hide these options however, preferring to advertise thirty-day free trials and ‘instant reports’ online; the £2 statutory report usually gets posted to you and takes much longer. These free trials can be much easier, but remember to cancel the membership if you don’t want on-going regular access to the credit report.
Whilst it is widely known that credit scoring can be harsh and unforgiving at times, I think the most surprising thing to come from situations like this is how the lenders will exclude both parties if one has any kind of adverse in their credit history. Common sense would suggest that, if one party is added to an application and causes it to decline, the solution is to remove that party. Unfortunately this is not the case and if you have a property purchase riding on this, having to explain why you have to make a new application could shatter the confidence of the vendor and potentially lose you the property. Checking out our credit profiles is essential these days, because the consequences could be more severe than you might expect!