How can being a guarantor affect your credit rating
If you’ve been approached by a family member or friend about being a guarantor, it’s important to understand the reasons behind it, and how it can affect you. Usually, a guarantor is needed when the borrower has to prove to a lender that they can definitely make the repayments. This could simply be because they are too young to have a credit history, or else that they have bad credit and the lender needs proof that they won’t miss a payment.
There are various other reasons why someone may ask you to be a guarantor too, and it’s strongly recommended that you look into what it means to be a guarantor before confirming, as you’ll be expected to make any of the payments that are missed by the borrower. It’s worth educating yourself on the process, and checking what it could mean for your credit history.
Do guarantors get credit checked?
The borrower doesn’t always have to have a credit check to be approved for a guarantor loan, but what does that mean for the guarantor? Anyone who is expected to be a guarantor for a loan will have to undergo a credit check. The lenders want to see that the guarantor has a strong credit history, highlighting that they have experience of paying off debts efficiently and on time.
The guarantor will have a credit check during the application process, and they’ll need a good credit rating to pass. What makes a good credit rating changes depending on the lender as each may have different criteria, so even if a guarantor has a good credit rating from their own independent checks, there’s a chance a lender may not approve them.
Does being a guarantor affect your credit rating?
Generally, being a guarantor shouldn’t affect your credit rating as long as the borrower keeps up with their repayments. This may seem like a simple answer on the surface, but there are a few things to consider.
- If the borrower doesn’t keep up with the payments and the loan goes into default it will appear in your credit report
- If you have had to step in it can actually have a positive affect, but this relies on you effectively making the repayments yourself too and a positive change won’t always be the case
- However, if you, as a guarantor, don’t make the missed repayments then it will negatively affect your credit rating
What does it mean for a guarantor applying for a mortgage?
As with a credit check, it generally shouldn’t be too much of an issue for someone applying for a mortgage, especially if the borrower meets all of their repayments, but there are some cases where it may hinder an application.
When you apply for a mortgage the broker will perform a series of affordability checks, to make sure that the mortgage you are applying for is one that you can genuinely afford to pay off. As part of this they will look at any incomings and outgoings that you have, which will include debts. Inherited debts will come into this and, if you’ve been called upon to repay someone else’s debt, or are currently part of a guarantor agreement where there’s a chance you may have to pay something out in addition to your current outgoings, a broker may turn you down for a mortgage.
How do credit scores work
A credit score is created based on your credit history. Guarantor loan lenders will look at your credit score when they are reviewing your application for things such as loans, credit cards and mortgages and use it to assess whether they deem you can afford to make the repayments.
Your credit score is affected by your credit report, which is look back at the previous 6 years of your credit history. This will include any credit you’ve held including, but not limited to:
- Whether you are on the electoral roll
- Any direct debits and regular outgoings you have like bills or rent
- Any debts you’ve efficiently paid off, like credit card bills or loans
- Car finance
This is all then used to calculate a credit score. Each lender will have their own criteria about what makes each level, and their own system for measuring it, but they will still use the same terms for the different levels:
- Very poor
Having a good or excellent credit score will give you access to the best rates and make you more likely to be approved for a variety of things.
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