Your credit score is a rating based on how you have behave with your previous loans. Both good information and bad information will be recorded on your credit rating and it is the points that are allocated to each of these events that create a numerical score, that lenders use to judge you.
For example, if you have constantly taken out loans and paid them off in full every time, on time, then your credit rating will be good and the credit score will affect this.
On the other hand, if your previous loans have suffered many missed and late payments and the credit companies have had to chase you for payments, or worse still they have had to write off some of the loan because you have not kept up with payments, then your credit rating, and therefore your credit score, will reflect this as a warning to lenders that you are not a good credit risk.
So the credit score becomes an indicator of how overall you have performed with loans in the past. Your potential mortgage lender looks at this score to get an idea of whether you have been good with money or not so good.
If the credit score looks favourable, they will assume that because you have behaved well with your finances previously then you are probably trusted with their money and this makes them more willing to lend you the money. Conversely, a poor score indicates failure to repay loans and this will be a warning to them that you might be a difficult customer to get all of the money back from in the future.
So the first effect of a credit score is how willing they will be to lend you money. Of course, this is not the only attribute they are going to take into account. If you are able to put down a huge deposit, say you are only asking for 25% of the property’s value, then even with a lower than perfect credit score they will more than likely be happy to deal with you. But if you need a 95% mortgage, then your credit score is going to need to be pretty good.
The other affect that your rating has is on the actual interest rate that you will be offered for your future mortgage. Assuming that you are made an offer, only those applicants with the best score and the highest deposits will get the best rates that the lender has on offer. For those with lower deposits and worse credit histories, the offered interest rates could be a lot higher. So your score could end up costing you more with your mortgage.
This is why before applying for a mortgage it is well worth applying to see your credit rating and checking that everything is correct. Make sure that there are no errors and that, equally importantly, there are no pieces of positive information missing, such as paid off loans.