Why is it important to keep a high credit score for a mortgage?
A high credit score is crucial when applying for a mortgage as it reflects an individual’s creditworthiness and ability to repay a loan. Lenders use credit scores to determine the risk of lending to an applicant and to set the interest rate for a mortgage.
A high credit score generally indicates that an individual has a good history of managing their finances and paying debts on time, making them a lower risk for the lender. As a result, individuals with high credit scores are often offered more favourable terms, such as lower interest rates, compared to those with lower credit scores.
On the other hand, individuals with low credit scores may have difficulty obtaining a mortgage or may be offered less favourable terms. Therefore, having a high credit score is a key factor in securing a mortgage and can have a significant impact on the overall cost of the loan.
How does a lender’s credit score/search work?
A lender’s credit score will vary from lender to lender as each will have its own internal matrix. There will be a flat decline in the system and different types of scoring. For most lenders, the requirement to be accepted at certain loan to values will depend on your credit score. For example, at 95% loan to value, you would need a higher credit score than you would at 75%.
What will damage your credit score?
- Frequently setting up new accounts
- Being close to your credit limit
- Applying for credit too often
- Frequent insurance quotes
- Missing payments
- Borrowing more than you can afford
- Entering a debt relief order or individual voluntary arrangement
- Getting a County Court judgement issued against you, or applying for bankruptcy
- Having little or no credit history
Why do these points result in a low credit score?
- Opening a new bank account would lower your credit score in the short term – but if you open new accounts too frequently, your score will not have time to recover.
- Reaching the limit on your credit card or using your entire overdraft – sends a signal to lenders that you are reliant on your credit facility and could lead them to believe you are in financial difficulty.
- Applying for credit too often – multiple credit applications can negatively affect your score, regardless of whether they’re successful. This is because each application records a hard search on your report. Try only to apply for credit you’re eligible for, as applying too often makes it look to a lender as though you are seeking to live beyond your means.
- If you miss a payment, this will be recorded on your file as a missed payment. To a lender, this looks like you cannot afford to keep up with your finances or you are unable to manage your finances. This will stay on your file for up to six years.
- If you were to miss concurrent payments over more than six months, this would be recorded as a default. In turn, this would demonstrate to lenders that you are in financial difficulties. They may record a default on your report. This can significantly lower your credit score for up to six years.
- Entering a debt relief order or individual voluntary arrangement, having a County Court judgement issued against you, or making yourself bankrupt will all demonstrate to a lender that you are in severe financial difficulties. Any of these events will significantly reduce your credit score and make it difficult to borrow money or even open a bank account in the future.
- If you’ve never had credit, you’ll likely have a low credit score. This is because there is no track record of you maintaining credit; therefore, lenders are not able to test your creditworthiness. However, the good news is that you can take steps to strengthen your credit file.
What can you do to boost your credit score?
- Only borrow what you can afford. If you want to use credit, make sure you can at least meet the minimum repayments comfortably.
- Consider setting up direct debits. Regular payments look good to lenders. Having a direct debit is a good way to take all the appropriate steps to ensure you do not miss a payment.
- Stay within agreed credit limits. For credit reporting purposes, it looks better to a lender if you owe less than your limits.
- Try to keep long-term, well-managed accounts. Many lenders will score your credit based on an average of your account conduct.
- Register to vote at your current address. Companies use the electoral register to help confirm who you are and where you live. This boosts your profile as they can find you and verify you, helping to boost your credit profile.
- Check your credit report regularly to ensure it remains at a good or excellent rating. You can help protect yourself and your credit score by checking your file. In addition, look out for unfamiliar or suspicious entries in your credit report as these could mean you have been a victim of fraud or identity theft.
How do I download a credit file?
Many credit reference agencies will allow you to download your credit file. The main ones are:
- Experian – download your Experian credit report here: https://www.experian.co.uk/consumer/statutory-report.html
- Equifax – download your Equifax credit report here: https://www.equifax.co.uk/Products/credit/statutory-report.html
- TransUnion – download your TransUnion credit report here: https://www.transunion.co.uk/consumer/get-your-credit-report
What information shows on my credit file?
- Personal information:
- Your name, including any aliases/previous names or misspellings reported by creditors
- Date of birth
- Current address
- Previous addresses
- A list of your credit accounts, including:
- Credit cards
- Loans
- Hire purchase
- Overdraft
- Current accounts
- Utility agreements
- Mortgages
- Public records such as bankruptcy or County Court judgements
- Recent searches on your file can include:
- Credit applications
- Voter’s roll checks
- Insurance comparison website checks
What information will the file show on each of my credit accounts?
For each of your credit accounts, the report will show the following:
- The date the account was opened
- Credit limit
- Current balance
- Current status – is the account up to date? Dormant? Default? Closed?
- Payments over the past 72 months
- If the account is in default, how long has it been in default, and for how much?
How long does information stay on my file?
Information about payments, bankruptcy, defaults, etc., will remain on your file for six years.
Can I get a mortgage if I have adverse credit on my credit file?
Yes. Having adverse credit on your credit file may reduce your options, but this will largely depend on the level of adverse credit on your file. We can explore multiple options:
- We can source lenders who are known to be more lenient regarding the credit scores of clients who have had a minor blip on their credit file.
- We can also source lenders who do not score clients’ credit, which will enable us to get a human being to review the case and determine creditworthiness.
As a broker, we will be able to identify any issues and look for potential solutions to enable you to borrow the amount you need.
What if the issues on my credit file were the creditor’s fault?
If the issue on the file was the creditor’s fault and not yours, then provided we can obtain written confirmation that it was the creditor’s fault, we can appeal the score decline with the lender to enable you to proceed with a standard high-street lender and not be jeopardised by the creditor’s error that incorrectly raised the issue on your file.
Please note: a mortgage is secured against your home or property. Your home or property may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
