When applying for a mortgage, you may be concerned that your credit score is too low and you could potentially be rejected for a loan. If this is the case, or you simply wish to improve your credit score, follow our top tips and you’ll be on the road to a great score in no time.
1. Check Your Credit Files
Your first step, in any case, is to check your credit files from one of the 3 major credit reference agencies - Experian, Equifax, and TransUnion. Once you’ve created a free account with one of these, you can easily order a copy of your credit files and review them yourself for any inconsistencies or entries that are incorrect.
2. Correct Any Inaccurate Information
One of the most common problems on credit files is incorrect information, which could have an impact on your credit score. Once you have a copy of your files, you should review it carefully and closely, ensuring to dispute any incorrect information immediately. To do this, you’ll need to contact the credit reference agency and tell them which information is wrong and why. For example, it may be that there is an account shown open on your file that, in reality, has already been settled and closed.
3. Get All Of Your Accounts Up To Date
If there are accounts on your file that are showing late or missed payments, you should update them or pay them off as soon as possible. This will ensure that:
Overdue accounts start to drop off your credit file
Your debt-to-come ratio will fall, increasing the affordability of mortgage payments
4. Pay All Your Credit Facilities By The Due Date Every Month
Mortgage lenders want to know that you are a reliable borrower, and that you can make debt repayments in a timely manner. To show this, you should:
Pay your credit card balance every month, by the due date
Put all of your bills and regular payments on standing order or direct debit
If you pay all of your bills in a timely manner, a lender will be able to see that your financial management has changed and you are now more reliable. Your credit score will start to improve in a matter of months.
5. Stick To A Spending Budget
The best way to keep your bank account in the black and not go overdrawn is to decide on a monthly spending budget for yourself - and then stick to it. Now and again you may need to use an overdraft facility to pay for emergencies, but you should avoid being constantly overdrawn. If you do need to use your overdraft facility, ensure not to exceed the agreed limit. This same rule applies for credit cards, store cards, and any other credit facilities that you may have.
Keeping within the black and not overspending shows a lender that you live within your means and have a good control of your finances.
6. Don’t Apply For New Credit
If you apply for new credit facilities on top of those that you already have (credit cards, personal loans, HP, etc.) your credit file will be marked negatively. Resist the temptation to apply for more credit and stick within your budget and spending means.
7. Register On The Electoral Register
Registering on the electoral register is one of the easiest things you can do to improve your credit score. Lenders can confirm who you are from this, helping them to determine your eligibility for a mortgage. You can find out more about registering here.
8. Open A Credit Card
You should not open new credit facilities if you already have them, however, if you have none at all then lenders don’t have any point of reference to judge your reliability as a borrower. One of the easiest ways to provide this evidence is to open a credit card - there are several cards available to those with bad credit files.
The immediate effect of this may be to lower your credit score, but after a few months of spending on your card and repaying your monthly statement in full, your credit score will improve. This is providing that you use it wisely and repay the balance in full every month.
9. Don’t Close All of Your Credit Accounts
Whilst lenders don’t typically like to lend to people with lots of open credit accounts, they do want to see a history of credit and credit used. Your credit score is also affected by something called the credit utilisation ratio - this tells a lender much about your financial situation. Here’s how it works:
Let’s say that you have three credit cards, each with a credit limit of £5,000
Two of the cards have outstanding balances of £3,000
The third card has a zero balance
Your credit utilisation ratio is 40%
If you close the card with a zero balance, your credit utilisation ratio rises to 60%
The higher your utilisation ratio, the less likely a lender will be to offer you a mortgage. So, in this case, closing a credit facility would work against your aim of improving your credit score.
Putting all of our tips into practice will help you to improve your credit score. However, it takes time for these changes to filter through to your credit file, so you should keep a check on your credit score and make sure that you are taking the correct action to continually improve it.
For more tips on how to do so, or if you need advice on bad credit mortgages, contact Mortgage Thoughts today.