If you have ever applied for a mortgage, loan or mobile phone contract, then you may already be familiar with the idea of ‘credit scores’.
This rating determines your suitability for credit, however, there are many misconceptions on what factors can influence your overall score.
This guide will explain the basics of credit scores and what steps you can take to improve your overall rating.
A credit rating is a score that lenders will give you based on your financial records (i.e. your incomings and outgoings, as well as your track-record of paying bills on time).
Each lender gives you a score and based on that score, as well as the lender’s own affordability checks, they will issue you a rating. This rating will determine whether you are suitable to take out a contract with that company. The score is designed to predict your future spending habits, based on your current and past spending activity.
A Credit score is not:
As well as determining whether you can afford to pay your mortgage/loan, and pay it on time, your personal credit rating will also determine what rate of interest you will be charged by your mortgage provider.
A good score will land you a lower rate of APR, as a rule of thumb. However, some lenders will advertise mortgages rates as “representative.” This means that if you have an approved credit rating, you will be eligible for the advertised rate, along with 51% of their other customers. On the other hand, if you do not meet their requirements, you may be charged a higher rate of APR.
Please note: Your eligibility is not solely based on your score. When applying for a mortgage, the lender will also take into account what you have written on your application.
How Can I Find My Credit Score?
There are three main websites where you can see your credit score;
Your credit score is based on a number of different factors, which will vary depending on the lender’s preferences. Some things that could influence your rating include;
The ideal mortgage applicant will have taken out some form of credit before and will have an excellent record of paying their bills on time.
Too Many Applications - Applying for a number of loans and mortgages at around the same time can have a negative effect on your credit score. This is labelled in the industry as a ‘hard footprint’ or ‘hard search,’ and other lenders will be able to see these applications.
See our guide to the benefits of using a mortgage broker, it explains that going through a financial advisor will mean that they can shop around and find you the best deal on your behalf.
Too Many Credit Transactions – If you pay for lots of things on credit, this could negatively affect your credit file, even if you always pay everything off on time. Fewer transactions, spread out over a longer timeframe may make you a more attractive prospect for some lenders.
Inconsistency - Similarly, if you list different telephone numbers or altered job titles on your mortgage application forms, lenders may see this as an inconsistency in information, which in turn could have a negative impact on your report.
Instability - Stability can also be an indicator of your credit worthiness. If you change jobs frequently or move to different rental houses regularly, this could potentially have a negative effect on your credit rating.
No Credit – If you have avoided taking out credit completely, you may have negatively impacted your credit file. This is because lenders, when examining your finances, may have too little information on you to determine whether you will be a reliable customer or not.
It is vital to ensure that the information provided on your credit report is correct. There are several credit score checking websites online, where you can check what the lenders see in your application. Items which you can change and correct include;
If you notice any of the above changes in your credit score, write to the credit agency, providing evidence and get them to make the corrections to your credit report.
If you have no credit rating, i.e. lenders have too little information to make a prediction about your future spending habits, or if you have a less-than-perfect score, you can take the following steps to improve your credit file;
As stated previously, rejection from one lender does not equal rejection from all lenders. You could try talking to a specialist broker who may be able to help you find a suitable loan for bad credit history. For more on this, check out our Guide to Getting A Mortgage with Bad Credit.
There are also alternatives for those who have not built-up a rating yet, you could try looking at our Guide to Guarantor Mortgages, Shared Ownership, Joint Mortgages, or Family Offset Mortgages for more suitable options.
Your credit rating is important, but it is not set in stone. If you would like to seek independent advice from a mortgage advisor, get in touch now.
My biggest concern was finding a mortgage with no strings attached. My options were clearly explained to me and I felt confident about the decision. Alice Silverman, Stoke-on-Trent
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