Unless you are one of the lucky few, a mortgage is essential when purchasing a new home, and to be approved for one you’ll need a good credit score. But what does that mean?
What’s your credit score?
There’s no simple answer as all the main credit reference agencies use their own systems and come up with their own score.
One example is FICO Scores, which uses ratings between 300 and 850, with a score above 670 considered ‘Good’, and 800 or more ‘Excellent’. All these agencies use a wide variety of data to calculate your score. This includes things like bank accounts and credit cards, other loans, and utility/phone bills from the last six years.
Legal records of bankruptcies, insolvencies and County Court Judgements (CCJs) are also taken into account. There’s also an ongoing tally of companies checking into your credit profile – too many of those and it looks like you may be struggling to find a lender. Not only are there different scoring methods from different agencies, but mortgage lenders also have their own rules and levels of risk, so it’s impossible to summarise your chances of successful approval of the mortgage you want with one score number.
No credit history?
It might seem strange (and frustrating) but having no credit score from borrowing money isn’t much better than having a bad one, as lenders will still consider it a big risk. But things like direct debits, paying off your utility and mobile phone bills will help to contribute to your score.
How to check your credit score
It is certainly a good idea to check your score before applying for a mortgage. The UK’s main credit reference agencies are Experian, Equifax, TransUnion and Crediva and you might be able to check your score using a free monthly trial.
Start building a credit history
Firstly, make sure you are on the electoral roll, as lenders will use this to check your identity. Setting up a credit card is a good move even if you only use it for small purchases each month, and at least pay by direct debit the minimum, if not the bill in full, on time every month. Over time this will show you are a reliable borrower.
Improving your score
Once you have a score, it’s important to maintain and improve it. You can do this by making sure you make all your repayments on time. The more you use your credit card and pay on time, you will be seen as more reliable, but try not to go above halfway over your credit limit and certainly don’t ‘max out’ on it. Also, don’t open more credit cards just for the sake of it – it’s far better to use the one you have more regularly. A long-term employment history and living in one place for a good length of time will also be looked upon favourably by lenders.
Are you ready to take on a mortgage?
If your credit is already good, maintaining it will be key to getting the mortgage you want. Don’t take on any new debt just before applying for a mortgage. It’s also important to ‘de-link’ yourself from accounts that you have no connection with any more. You may be seen to have a financial link with someone else, for example, a previous partner, and if there have been late or default payments and debts on their part, it could reflect badly on your own history. You can write to the credit agencies asking for a ‘notice of disassociation’.
Read the first of our New Home Buyers guide series for some handy tips.
Keep tuned for part three of the New Home Buyer series, where we look at how to get the most out of your show home visit.
