Your credit score is a fundamental part of getting onto the property ladder. Your credit score helps lenders decide whether to give you a mortgage. The higher the score, the better you managed your debt in the past, which makes it more likely that you will be considered low risk and therefore given a mortgage.
Buying your home is a long term commitment and learning how to control and manage your finances will improve your credit score and prepare you for the future.
A credit report is a document which contains information on your credit history and financial dealings. It clearly shows how you handled your debt in the past 6 years: how much you borrowed, from whom and if you repaid it on time.
The most common types of credit are mortgages, loans, overdrafts and credit cards. But there are many other situations where you obtain credit, though you might not realise you’re doing it. For example, mobile phone contracts spread the cost of your phone over the length of the agreement. Utility bills also count as credit, because you receive the utilities before you pay for them. A strong credit score can be achieved by understanding how the system works and changing your financial habits long term.
Firstly, you need to know what you earn and how much you spend. The more you earn and the less you spend, the better your score. Reducing smaller expenses like coffees, scratchcards, making your own lunches will help you save. Reducing larger spends, for example getting a flat mate or swapping your utlities could make a big difference. Secondly, paying your bills on time and in full will make the difference between a acceptable and exceptional credit rating.
Taking control of your debts and paying them off gradually will also increase your credit score. Having a varied credit mix and showing that you can managing multiple types of debt, overdrafts, bills, car loans, credit cards will also improve your score.
When it comes to credit cards, applying for too many at once incurs a negative mark as it looks like you are desperate for credit. If you are thinking of applying for a mortgage, try not to apply for a credit card 6 months before. It is best practice to keep the balances on the cards hovering around the 50% mark. Lenders want to see that you are able to be in debt over a long period of time and stick to the payments. However, spending little and often and paying them back will also help.
You no longer have to pay to get your credit score checked. Websites like ClearScore now offer free checks and there are opportunites to dispute any marks that come up as negative. Signing up to the electoral roll will increase your score as lenders will note your registration as a sign of stability. They do not check current bank balances, student loans, or council fines but they do check if you have been declared bankrupt or have been involved in fraudulent activity. One note, is that using payday loans like Wonga will negatively mark your mortgage application and often results in an instant rejection. It is worth researching these payday loans before you apply to check if they affect your future mortgage application status.
Lenders will also look into your lifestyle when assessing your mortgage application. Online apps now make it easy to bet on sports however just occasional bets can also effect your score and this even includes using an online account to play the National Lottery regularly.
Being in your overdraft is also taken into consideration, many do not consider it a debt however it can make the difference between being accepted or rejected.
One last tip is mobile phone contracts, as many experience issues when moving from one provider to another. The ‘last bill’ often gets forgotten and customers often get a default noted against them. The amount was so small that the provider doesn’t contact them however it can show up on your credit report and impact a lenders decision later on during the mortgage application stage.
Taking smalls steps and introducing a new routine for dealing with your finances will help you get prepared for your future mortgage. Improving your credit score and managing your money efficiently is an easy skill to learn and practice makes perfect! If you want to assess your financial situation and make a plan towards financial stability, we can put you in touch with our Mortgage Specialists who will be more than happy to help you. Contact them today using our online chat facility and make the first small steps towards owning your dream home.