Do you need to improve your mortgage credit score?
For many of us, finding the right home can be the easy part of buying a home; arranging a mortgage can be the hard bit. Since the financial crash of 2008, mortgage lenders have tightened up their lending criteria and often, particularly with high-street banks and building societies, the best mortgages are only available to people with perfect credit scores.
Many of us fall short of this holy grail of the world of credit; some due to failure to meet regular payments in the past and others because they do not use credit. In some circumstances, an individual’s credit score can also have been adversely affected by mistake.
What is a Credit Score and How Does it Affect Getting a Mortgage?
Every time you borrow money, the company you are borrowing from will create a file of your account to share with a credit bureau. The information contained in the file relates to the total sum borrowed, the amount still owed and a record of how well you manage your repayments.
Your file will also contain details on your credit search history (who you applied with for credit in the past) as well as a full report on any linked accounts such as a joint bank account, mortgage or other form of borrowing. As well as your personal details, the file also lists any known addresses you have been associated with, registered at or used in your credit application history.
In short, your credit file is a complete record of any borrowing you have, have had or attempted to have in the last seven years.
The file is the basis on which other lenders judge your suitability as a customer and this includes mortgage companies.
Improve Your Mortgage Credit Score
Check Your Credit Report
Get the Facts
Starting from a position of knowledge is the most important part of improving your credit score. You can access your credit file by contacting one of the main credit agencies such as Equifax of Experian.
Check the Detail
When you receive your credit report, go through the detail with a fine-tooth comb and make sure that all of the information relates to credit accounts and searches that you are aware of.
All credit accounts include a score based on your payment history so be sure to check that any payments listed as being late are correct.
Clear up any Misunderstandings
Credit reports can and do contain errors so it is important that any errors are cleared up with the relevant company and the credit bureau as soon as possible.
Common errors include:
- Payments being incorrectly listed as late or missed;
- Incorrect balances being attributed to an account
- Incorrect address being attributed to a person
- Accounts being attributed by association without due cause
Whilst some mistakes cannot be amended, you can have notes added to your credit file which can help explain circumstances surrounding any ‘blips’ in your credit history.
If your credit file is linked to someone with a poor credit history then it is important to have this relationship clearly defined with your mortgage lender. As your credit report details your full history it is not possible to have joint accounts removed from your file but if you are no longer associated with this person and their history is affecting yours then you can apply to have the link removed. Be aware that you may need to prove the connection is no longer valid.
Taking Positive Action To Improve Your Score
If you have missed payments in the past and have a poor credit history then you will need to take some action to improve it.
Mortgage companies will complete a credit check, not only to see what kind of history you have in making repayments to other companies but to assess your overall credit liabilities. If you owe a lot of money on credit then this affects your affordability assessment and can jeopardise a mortgage offer.
If you are struggling with debt then a mortgage may not be the most sensible of options if the circumstances of arranging one means paying lower monthly mortgage fees. This kind of scenario is best dealt with by a debt management company or using advice from the National Debt Line.
Make Sure You On The Electoral Roll
Being registered on the electoral register validates your identity with potential lenders and improves your credit score providing this matches the address which you are applying for credit from. It’s free to register and easy to do; get in touch with the electoral commission via gov.uk/register-to-vote.
Pay Your Bills On Time
Set up automatic payment reminders or use Direct Debit to avoid missing payments on your credit accounts. Late payments harm your credit score whilst timely ones will help to boost it.
Your payment history contributes 35% towards your score and demonstrating the ability to service your debts is a good things.
Prioritise Your Debts
Any credit accounts that have moved to the collection stage should be prioritised to avoid further and more harmful action being taken. Unpaid accounts that are sent to collection agencies can ultimately end up going to County Court and result in a judgement against you.
Just remember that even when you pay off an account the details stay on your files for seven years.
If you are contesting an account then make sure you follow due process and keep everything in writing. Sometimes it is easier to pay a bill and contest it for a refund than to deal with the implications on your credit history for the next seven years.
Pay Off Your Credit, Stop Moving it Around
Firstly, paying off your credit rather than moving it around is the single most important thing you can do to improve your rating.
Lowering your overall debts on credit accounts will impact your credit score as the total amount owed contributes 30% towards your rating.
Get Credit to Improve Your Mortgage Credit Score
Some people have a poor credit rating which can affect their chances mortgage credit score due to the fact that they do not have or have never had any credit. If you have never borrowed on credit then your initial rating could be low. To increase your credit score it is worth taking out a credit card to make a few monthly purchases on and then pay it off in full each month. This is a fast way to show credit companies that you can borrow and pay your bills on time.
Any well managed credit account will improve your credit score and the longer you hold an account the better it rates on your score.
Close Unused Credit Accounts
As per the last tip, well managed credit accounts are a positive boost to your history but having access to too much credit even if you don’t use it) can reduce your standing.
Don’t Open Too Many New Credit Accounts at Once
In a bid to try to improve their rating to increase a mortgage credit score, many people try to open as many accounts as possible. This can immediately lower the average age of your other credit accounts which is a negative thing.
Avoid Applying for Too Many Loans
Whilst you may want to search for the best loan or credit card, always make sure that any searches performed in your credit files are a ‘soft’ search. Hard searches on your file indicate to a lender that you have applied for an account and failed. Too many of these can signal that you are a risk even before they get into the detail of your file.
Consider the Alternatives
Unfortunately if you have a bad credit history, for whatever reason, then there is no magic wand that will boost your score overnight. A combination of patience and a dedicated attitude towards servicing your existing debts responsibly will eventually pay off.
That might not be the best news for anyone looking to arrange a mortgage in the near future but there are also alternatives.
High-street mortgage lenders may not be so willing to open a mortgage account for an individual with a less than perfect credit history but some other companies will.
Rates are not always as high as you would think and can still be affordable within your budget. For the best information on alternative mortgage providers and improving your mortgage credit score you should seek the services of an independent financial advisor.
Property Assistant is an independent estate agent covering the Thames Valley who works within the Keller Williams network. We provide advice on all aspects of the home-buying process and would love to be able to help you in your search for a property, whether that is buying or renting. If you’d like to know more about our services, call us today on 0118 912 2370
Featured image via Pixabay.