Your credit score is extremely important when applying for a mortgage.
Put simply, it helps lenders decide if your application should be approved or declined and what terms they can give you.
The higher your credit score, the greater chance you have of securing the best mortgage deals.
What is a credit report?
Your credit report is essentially a financial CV that contains all of the information a lender needs to confirm your identity and determine whether you’re a reliable borrower.
It provides lenders with a summary of how well you manage your finances and tells them if you are a risk or not.
Should I check my credit report?
You should check your credit report to ensure the information on it is correct.
It will also help you to understand what factors may be affecting your score.
There should be a credit report on you if you are over 18 and have taken out credit or borrowed money before.
Getting your credit report does not hurt your credit score.
You can look at your own credit history without it being visible to companies on your credit report.
If you spot a mistake on your file, contact the relevant agency and ask for a correction.
You will need to explain why the information is wrong and supply any appropriate supporting evidence.
What is a good credit score?
You can request a basic report from either of these agencies for free.
Each credit referencing agency has their own scoring system:
• The Experian Credit Score runs from 0-999. The score levels range from very poor (0-560) to excellent (over 961).
• The Equifax Credit Score runs from 0-600. The score levels range from very poor (0-279) to excellent (over 466).
What affects your credit score?
According to Experian the top 5 factors that affect your credit score are:
1) Payment History
This is the most important ingredient in credit scoring, and even one missed payment can have a negative impact on your score.
Lenders want to be sure that you will pay back your debt, and on time, when they are considering you for new credit.
Payment history accounts for 35% of your FICO® Score, the credit score used by most lenders.
2) Credit Utilisation
Your credit utilisation ratio is calculated by dividing the total revolving credit you are currently using by the total of all your revolving credit limits.
This ratio looks at how much of your available credit you're utilising and can give a snapshot of how reliant you are on non-cash funds.
Using more than 30% of your available credit is a negative to creditors. Credit utilisation accounts for 30% of your FICO Score.
3) Credit Mix
People with top credit scores often carry a diverse portfolio of credit accounts.
Credit scoring models consider the types of accounts and how many of each you have.
Lenders use this credit mix to understand past debt experiences and how you have handled them.
4) Hard Enquiries
Hard inquiries are recorded in your credit file each time a lender requests your credit report as part of their decision-making process.
Hard inquiries remain in your credit file for up to two years and can in some cases have a negative impact on your credit scores.
5) Negative Information
Late or missed payments, foreclosures, collection accounts, and charge-offs are all examples of negative information that can appear in your credit file.
These typically indicate that you have defaulted on a loan in the past and can be red flags for lenders looking to approve you for new credit.
The effect negative information has on your credit score depends on your overall credit profile and what type of record it is.
These records typically stay in your file for at least seven years, so it's best to avoid any negative infraction if at all possible.
How can I get and maintain a good credit score?
Register on the electoral roll
Registering to vote is one of the easiest ways of boosting your score. Lenders use electoral roll data to verify your name and address.
It is very important that lenders are able to confirm your identity to avoid problems with fraud and identity theft – the more security that lenders have in terms of information, the more confident they are in lending money
Demonstrate financial stability
The best way to improve your credit rating is to manage your debts well.
Always make your payments on time and stay within your credit limits.
Try and keep balances to less than 50% of your limit.
Close down any old accounts
The lender will look at all your available credit before they make a decision on your application.
Even though you might not owe anything on the cards, it is best to close them down.
Check for credit report mistakes
Your credit score may be affected if information about your financial history is incorrect so make sure you amend any errors.
Avoid too many applications
Your credit record will show every credit application you make.
If you get declined, avoid making a new application for a few months.
When you make multiple credit applications, you will appear as desperate for credit, which will affect your credit score.
Cut financial links with previous partners
When you take out a joint mortgage or joint bank account, you become "financially linked" to the person you've taken it out with.
If they have a bad credit rating, it could impact yours so make sure that you inform the credit reference agencies of your disassociation.
If not, the other person's financial dealings could still have an impact on your credit score.
Avoid payday loans
If you need to borrow money quickly, do not consider a payday loan unless you have no other options.
A payday loan application shows up on your credit record, and your credit score will get negatively affected even if you get accepted for the loan.
Payday loans indicate that you are desperate for money, and unable to get a cheaper alternative way of borrowing.
Build your credit history with a credit card
If you've never had credit before, it's difficult for a lender to assess you.
Consider taking out a credit building credit card, making a couple of purchases on it each month and then repaying the balance in full at the end with a direct debit to build a good credit history.
This will show that you can responsibly manage credit.
How long will it take to improve my credit score?
Unfortunately this won’t happen overnight.
How long it will take depends on what factors are hindering your score.
For example, if you have opened a new bank account or credit card, this information can take up to three months to reach the credit referencing agencies so it may take at least this long to see real improvements to your score.
The benefits to improving your score though are worth the time and effort particularly when it comes to applying for a mortgage as lenders may offer you better interest rates if they think you’re lower risk.
Liked this article? Try reading: 5 Steps to Obtaining Good Credit
Disclaimer: Mortgages for Yacht Crew does not provide advice in relation to savings and investments. This article is intended for discussion only and does not propose financial advice in any way, and therefore should not be construed as such. Your property may be repossessed if you do not keep up with mortgage repayments.