A reader asked:
I know a debt drops off my credit file 6 years after it was settled or defaulted. I just want to ask when I apply for a mortgage, can the lender dig up unpaid debts if they are no longer showing on my credit report?
This is a common question. The answer is Yes, sometimes because a lender can see other information that may show the debts.
Let’s look at what the lender can see, so you can tell if you need to be worried about this.
But first, make sure that you have checked your credit records with Experian, Equifax and TransUnion – the three Credit Reference Agencies (CRAs). Not all creditors report to the same CRA, so if you only look at one report, you may miss something important on a different report. See How to check your credit records for how to do this.
Mortgage lenders also look at your bank statements
Credit records are just one source of information for a lender – they are not the only thing that matters.
Most mortgage lenders want to see the last three months of bank statements, some ask for six months.
These statements show if you are making payments to debts that are no longer on your credit record. That could be payments to the original creditor, to a debt collector or to a debt management firm.
A lender can’t see payments that are no longer being made, either because the debt is repaid or because you just stopped paying…
But it’s not safe to stop paying a debt just because it has dropped off your credit record. See Do I have to keep paying this old debt? for details.
Unless a debt is very old and statute barred or it’s unenforceable because the creditor doesn’t have the right documentation, you should be aiming to pay off problem debts where there have been defaults before a mortgage application. This could be with a full and final settlement – this won’t cause the debt to reappear on your credit record.
Lenders have their own internal records
Lenders can also look at their own internal records.
A lender may also be able to see records from other parts of the same banking group, so an application to Halifax could perhaps be affected if you had had an old problem debt with Lloyds.
There is no legal maximum time on how long a lender can keep these for – they don’t have to delete them 6 years after a debt has been settled or written off. Banks can keep data for a very long time – PPI claims have been settled for debts that were repaid more than 15 years ago.
So a lender may be able to tell if you defaulted on a debt, you went bankrupt or had an IVA, or you settled a debt with a partial settlement.
Some lenders may not mind if your debt problems were a long time ago, but you can’t assume they don’t know about them!
Who to apply to?
I always suggest that people should go to a mortgage broker.
Even if you have never had a debt problem in your life and have a great credit record, a good broker can still find mortgage deals that you may not be able to see and can smooth the way through what can be a stressful process.
This is even more important when you have had previous debt problems. Old problems may not be a problem at all for many lenders, but why take the risk? If you just apply to bank X, you may find out the hard way that bank X can see that old problem, cares about it and is going to turn you down because of it.
So tell a good broker about all your previous debt problems and you can get good advice on which lender to apply to. See Should you get a mortgage adviser? for how to choose a mortgage broker.