A poor credit score can have a big impact on your plans to buy your own home – especially since many borrowers don’t even think about it until they’re about to apply for a mortgage. But don’t worry, a poor credit score doesn’t last for ever and there are a number of steps you could take to begin to improve it - starting right now.
When you’re applying for a mortgage, some lenders require a credit score. A credit score is simply an indication of how a typical lender would assess you if you were to ask them for money, like a loan, credit card or mortgage. As such, they are vital to the process of financing for your first home.
Lenders try to predict how you will behave in the future based on how you’ve acted in the past. They look at information such as the number of times you’ve applied for credit recently, the amount of money you owe already, and how regularly you’re making payments to reduce that debt.
There is no single method of calculating credit scores. Two lenders might look at the same information and come to a different conclusion, based on their own particular lending criteria.
They will often use a credit reference agency to help this process. These agencies prepare ‘credit reports’ that provide details of your financial situation and assess your credit worthiness.
You have the legal right to see a copy of your credit report for free. This will include details of your credit score and some other information about you and your finances. You can request this from any of three main credit reference agencies (Equifax, Experian and TransUnion) that hold information on you.
There are a number of steps you can take which could help to improve your credit score (although you should aim to start this process at least one year before you plan to apply for a mortgage):
1. Pay your bills on time
All bill payments, including phone contracts, internet subscriptions and gambling accounts, are reviewed as part of assessing your credit score. Setting up monthly direct debits will help you avoid missing any payments – but remember, you’ll still need to have enough money to cover the direct debit in the account you’re making the payment from.
2. Pay off your debts
Any existing debt you have may have an impact on your credit score. Up to 30% of your final score may be due to outstanding debt, so if you do have outstanding debts, try to reduce the amount you owe by making regular payments each month.
Remember, consistency and reliability in terms of paying off debts each month indicates that you are taking your commitments seriously and can be relied upon to manage your finances responsibly - exactly what lenders like to see.
3. Avoid moving home too often
While there is no such thing as a ‘bad address’ for credit, credit reference agencies do use your address to verify your identity and match you to your credit history.
Moving home very often could act as a red flag to some lenders, as it might indicate you have difficulty paying rent on time, which would discourage them from giving you credit. By the same token, staying in the same home for a while indicates that you’re capable of managing rent and paying bills on time, and can improve your credit score.
4. Make sure you’re on the electoral roll
Registering to vote at your home address, even if you’ve lived there for some time, makes it much easier for credit reference agencies to verify your identity and circumstances. You can check whether you are registered at your address with your local council.
Remember, once you are registered at your address, it might take up to a month for this information to appear on your credit report, but it is a crucial part of demonstrating to lenders that you are settled, stable and reliable – and it is absolutely free of charge.
5. Check for fraudulent activity
If something on your credit report is incorrect or doesn’t apply to you. If someone applied for credit in your name without your knowledge, for example, you should contact the credit reference agency immediately to have your file updated.
The credit reference agency then has 28 days to either remove the information or inform you why they don’t agree with you. During this period, the information in question will be marked as ‘disputed’ - this means that lenders aren’t allowed to include it when assessing your credit score.
6. Reduce how much of your credit limit you are using
Lenders are particularly interested in how much credit other lenders have given you in the past, and how much of the available credit you are currently using. You have to strike a fine balance between not having too much unused credit (as you could suddenly increase your debts and jeopardise your ability to pay any new debt) and not having enough (as it might indicate that you are already struggling to meet your commitments).
For example, if your credit limit is £1,000 and you’ve used £500 of it, you’re only using half of your credit limit. Many lenders would see that as a sign that you are a responsible borrower, and could increase your credit score as a result.
7. Consider using a credit-building credit card
Credit-building credit cards are a handy way for people with little credit history, or with a bad credit history, to prove that they are suitable for credit, and capable of maintaining payments over a period of time.
As these cards are designed for people who lenders believe are higher risk, credit limits are often low, and repayment interest rates high – usually around 30% a year, according to the Money Advice Service.
By using a credit-building credit card and ensuring the bills are paid regularly, you could prove you’re creditworthy, increase your credit score, and apply for other cards and loans when your credit rating improves.
It’s also worth bearing in mind that not all lenders use credit scores. At Leek United, for example, we believe in treating our customers as individuals. That’s why we don’t rely on credit scores when assessing a mortgage application. We assess all applications on a case-by-case basis, based on their specific merits.
This article is intended as a summary only and does not constitute legal or financial advice from Leek United Building Society. No reliance should be placed on this article. We recommend that you seek independent legal and/or financial advice if you have any questions or queries.
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