Getting yourself ‘mortgage-ready’ isn’t just about setting a budget and saving for a deposit, you can also improve your chances of being approved for a good rate by boosting your credit score. Alastair Douglas, CEO of credit experts TotallyMoney explains why credit scores are so important and how you can get yours into good shape.
Before going ahead with a mortgage application, you should know where you stand in the credit market. Although a lot of focus is placed on making sure you have your deposit together and the means to make your repayments (which are important), they’re not the only factors at which mortgage lenders look.
Securing the lowest mortgage interest rates can be helped by having a positive credit score and history. It could mean you avoid paying a higher interest rate, or minimise the chances of your application being rejected. Lenders care about your credit score. And with good reason…
Why mortgage lenders check your credit score
Taking out a mortgage can be a big commitment. For many of us, our mortgage is the largest loan we’re likely to have. And banks are aware of this.
Before agreeing to lend you a huge chunk of money, responsible lenders will look at your credit history. They do this for two reasons:
They want to protect their money and investment, because for them that’s good business. It makes sense.It protects you, too. Being given a huge mortgage you can’t pay back that lands you in financial difficulties is irresponsible on the lender’s behalf.
Running a credit check before agreeing your mortgage helps your lender build a financial picture. It shows how you’ve coped with large sums of money in the past. The upshot is that your lender is in a better position to agree a loan amount that’s realistic and manageable for the property you want to purchase.
How your credit history is checked
Your credit score is, in part, based on information held by a Credit Reference Agency (CRA). There are three main CRAs in the UK: TransUnion, Experian and Equifax. They all do a similar job of holding information about your loans, credit products and debts, and how you’ve managed them.
Lenders will often check your credit score with more than one CRA. CRAs take your credit information and compile it into a report. Your credit score is the number attached to your report and gives lenders an idea of whether you’re a good candidate to lend to, or not.
Providing you have a deposit and means to keep up with your repayments, a higher credit score often means you’ll get a better mortgage rate.
Making your credit report more attractive to lenders
One of the biggest things that impacts your credit score is your repayment behaviour. Missed payments or late payments on a credit product (both loans and cards) are marked on your credit report. These can be a red flag for some lenders, because it could signal you’re unreliable and struggling financially.
Timely payments lead to higher scores. You can easily avoid giving lenders cause for concern by setting up a direct debit or standing order. This way the amount you owe is taken automatically from your account each month, so you’re less likely to miss a payment.
You should also try to limit the amount of credit you use each month. If possible, cap your credit spending to 25% of your credit limit. Why do this? Well, regularly maxing out your credit (or going close to your limit) can suggest you’re credit hungry or in financial difficulty. As a result, your score can fall.
In terms of this affecting your mortgage application, reducing some of the most expensive debts you have before you apply for a mortgage could help.
Another biggie is applying for lots of credit products in a short space of time. Again, lenders may get the impression you’re a bit too keen for credit. While this won’t affect your credit score, lenders can still see your applications on your credit report and might be concerned if there are a lot of them in a short space of time.
Although it’s frustrating, if you’re preparing to apply for a mortgage and you’ve just been declined another credit product, avoid applying for another for around six months. I appreciate this is difficult, but your credit rating could be all the healthier for it. To avoid being rejected, it’s best to check your eligibility first and apply for credit products you’re most likely to be accepted for.
The biggest credit score boost: show you can use credit responsibly
Mortgage lenders prefer customers who are experienced at handling debt. One of the easiest ways to show a lender you’re a responsible candidate is by taking out a credit card.
It doesn’t have to be super flash with loads of benefits.
It doesn’t have to have a huge limit.
It just needs to show you can handle credit. That means keeping up with your repayments, always paying on time, and using your credit limit responsibly.
Around a year before you want to apply for your mortgage, take out a credit card. Use it for small purchases and repay the balance in full each month. This way you avoid paying interest and your credit score can get a little boost.
It all sounds pretty clear cut, right? But what if you’ve got no idea what your credit score is? Or you know you’ve not got the strongest credit history and maybe need to improve your score?
Getting a handle on your credit score before applying for a mortgage is possible, free and easy.
Understanding and improving your credit score
The first step in all of this is knowing where you currently stand in the credit market. Pre-2009 there wasn’t an easy way for consumers to check this, which is why we launched TotallyMoney.
If you’ve never checked your credit score then you can do so by signing up for a free TotallyMoney account. This isn’t essential, but you could improve your chances of getting the best mortgage deal by understanding if any improvements can and should be made to your credit score before applying for a mortgage.
Let’s say you sign up for free credit report and score. Perhaps it’s not as good as you’d hoped. Don’t sink your mortgage plans just yet. There are ways to improve your credit score and we can help with that, too.
Article by Kate Saines for www.whatmortgage.co.uk