MortgageLadder’s 10-step guide to improving your credit score
As a potential home-buyer, there are many different things to think about. That’s particularly the case if you’re saving for your deposit and working on improving the overall general health of your finances and credit records.
One thing that all lenders will look at when they’re considering your mortgage application, is your credit report, or credit history. They use this to assess how good you are at repaying debt and behaving in a financially responsible way that’s also within the terms of any credit agreement you take out.
It’s important to understand that while your credit score, rating or history isn’t the only detail a lender takes into consideration when deciding whether or not they should lend you money, it is something that they all use as part of their assessment.
If you’re planning on buying a home of your own, either in the next few months or the next few years, it’s a good idea to check your credit rating and then do things to improve it. We’ve put together a short guide on how to improve your credit score to give you a better chance of having your mortgage application approved, with access to the lowest interest rates.
1. Register on the electoral roll
The reason this helps is because its official confirmation of your address and right to be in the UK. This simple action can make quite a difference to your credit rating and if you’re not on the electoral role, you’ll find it much harder to secure credit. Register to vote and your credit history will improve.
2. Check your credit file
Get in touch with the three credit agencies operating in the UK – Experian, Equifax and TransUnion – and request a copy of your credit file. Check it carefully and if there’s anything that’s incorrect on there, from your address, to employment to existing credit agreements and everything in between, contact them with the relevant proof and ask them to correct it. This is something you could do on an annual basis, particularly if you plan on applying for your first mortgage in the next couple of years.
3. Pay your bills on time
For some, this may come naturally. Some others might find it more challenging due to cashflow or not remembering bill dates. Where possible, you should consider setting up your bills to be paid via direct debit. Not only does this ensure you never miss a payment date; with many utility company, you also get a discount for paying via direct debit.
4. Try not to overuse credit
While it’s important to have a credit footprint so that your credit report has enough activity to be based on, if you use a lot of credit on a regular basis, then this can become a negative for your credit history.
If you have little or no prior credit exposure; having a phone credit agreement, a credit card or an overdraft may be a good move, provided you never go above your limit. For credit cards, you should keep your credit utilisation limit under 40% (that is if you have a total credit limit of £10,000; then try not to have a credit card balance above £4,000) otherwise lenders might assume you are overly dependent on credit. Where possible, use your credit card sparingly and pay it off regularly – this shows lenders that you know how to use credit and are fully in control of your finances.
5. De-link your financial records from any flatmates or ex-partners
If you have previously taken out a joint credit agreement with someone or shared a home, your financial footprint might have become linked together. This won’t always have a negative effect on your credit record. But, if your ex-flatmate or ex-partner has a poor credit rating, this can reflect on yours. You should therefore check your credit report for any past financial links and if needed, write to the three credit agencies requesting they disassociate your record with theirs.
6. Avoid payday loans
Use of payday loan companies is something that leaves you with expensive repayments for relatively small amounts of money. Some mortgage and credit underwriters have also been known to have rejected credit applications through a traditional lender, when they see a history of payday lender activity on an applicant’s credit file.
7. Don’t apply for too much credit
As mentioned earlier, it’s good to have some credit, provided you repay it on time and in line with the agreement. However, if you apply for a lot of different credit options, particularly if you do that over a short period of time, this can look as though you’re desperate for credit and might set off alarm bells for mortgage and credit underwriters.
8. Close any old credit accounts
If you have any old credit or store card accounts you no longer use, it might be a good idea to close them. One exception to this is where this will affect your credit card utilisation limit (explained above). In this case, you might choose to keep open unused credit cards to increase your available credit thereby bringing down your overall credit utilisation limit
9. Prove your residency
Lenders not only want to see that you live in the UK, but also want to know that you’re permanently resident, especially if you’re new to the UK. If you aren’t eligible to vote in the UK, it’s still important to show credit agencies – and lenders – that you’re resident in the UK. You can do this by sending the lender a copy of your residence visa.
10. Pay your rent on time
For many renters, rent is a big part of their monthly expenses and it is a good idea to pay this on time but also to ensure this is seen by lenders. One way to do this is by having your rent payment recorded on your credit file. Signing up to a service like RenterBuyer’s free credit builder service help you do this. Of course, this will only be beneficial if you always pay your rent in full and on time – if you miss a payment, that will also be recorded in your credit history with Experian.
As you can see, there are quite a few different ways in which you can improve your credit report and many of them are pretty straightforward and achievable. The list of things to do may seem quite daunting but thankfully RenterBuyer’s free digital coaching programme can help you do all this seamlessly from the time you sign up.
A better credit rating and history can open up many opportunities for you, including access to lower interest rates and better terms for mortgages and other loans.
So, if you’re a potential first-time buyer who wants to make a successful mortgage application, a good credit score can help prove to potential lenders that there’s not much risk attached to approving your mortgage application.