"Your score can make a crucial difference to the amount of lending you are offered.”
Please be aware the below blog is older than 12 months, therefore the information may not be relevant or up to date.
Credit score. Two words that can strike fear into anyone trying to get or renew a mortgage. Lenders have always cast a critical eye over a less-than-perfect score but, post pandemic, their scrutiny has reached new levels of intensity. Naturally, they are concerned that the economic upheaval of the last 18 months will adversely affect your ability to repay your loan. Blunt though it may be, the credit score is one of the instruments by which they make this assessment.
So, if you’re going to be in the market for a mortgage market in the next 12 months, now is the time to start working towards the best possible credit score.
What is a credit score?
A credit score is a numerical expression of your personal credit files that represents your creditworthiness. Scores are produced by credit reference agencies such as Experian or Equifax, both of which allow you to view your score online. Your score can make a crucial difference to the amount of lending you are offered.
Many lenders have their own internal rating scales for your credit score, so your rating could differ depending on which lender you place your mortgage with. And, in turn, their rating could differ from your Equifax or Experian score.
How can you work towards a good score?
First off, you need to have credit files to have a score at all! The first steps towards building up a healthy file are:
- Have a bank account and keep it in good order.
- Have a regular payment coming out: a mobile phone contract for instance.
- Consider getting a credit card – but only if you’re certain you can make the payments every month without fail.
Don’t miss payments or default on payments: obvious but worth repeating. Credit scores will also reflect how you’ve dealt with outstanding credit in the past, so it’s important to manage credit well. This means that you should try to not max out your full outstanding credit and ensure you pay more than just the minimum payment each month.
Avoid hard searches
It’s important to realise that the more ‘hard’ searches there are on your credit record (that is, the ones that go into your file in more depth and are visible to companies), the greater the impact on your score. This can affect what lenders are prepared to lend to you. So, the few months before you apply for a mortgage are not a good time to apply for new credit cards, find out how much that shiny new car would costs you each month or move rental property too often.
If you’re at all worried about the health of your credit score, it’s really important to tell your mortgage broker that you don’t want them to do a hard search at the Decision in Principle stage (the stage at which a broker will input your details to determine whether a lender might be able to lend to you). Because if the lender rejects the Decision in Principle after a hard search, your next Decision in Principle or application could be rejected too.
Steer clear of payment solutions
Some (although thankfully not many) lenders like to inspect your bank accounts in minute detail, which is a good reason to avoid payment solutions providers such as Klarna. Even if you make the payments like clockwork, it might give the impression that you’re buying things you can’t really afford. It may not directly affect your credit score but it could influence lending decisions. The same has always been true of payday loan providers.
Spread the net
If you share a bank account with someone, even if they’re not applying for the mortgage themselves, ask them to follow this advice as well. Some lenders will view them as ‘financial associations’ and check out their credit history along with yours.
In summary, if you’re likely to need a new mortgage or remortgage in the next 6-12 months, it pays to start getting your ducks in a row early. Make sure you’ve cleared as much unsecured debt as possible. Don’t miss any payments. And give payment solution providers a wide berth.
Above all else, be honest with your broker. If there are any red flags, we can help you navigate them and find the lender who is most likely to be sympathetic to your situation.
by William Busby, Mortgage Adviser
