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Why your credit score matters when it comes to mortgages?

What is your credit score and how can you improve it?

Finding the best deal on your mortgage takes preparation and planning. One aspect of preparation is your credit score, which may affect the mortgage options and rates available to you. In this article, we’ll demystify what a credit score is, how it’s formulated and why it's important to your mortgage search. If you find that your credit score is problematic, fear not. Here, at Sprive, we have put together our thoughts on how to improve your credit score fast in order to secure the best mortgage for you.

Credit Score Mortgages

What is a credit score and how is it determined?

A credit score is a tool that lenders use to work out if you qualify for a mortgage, credit card or loan.

Your credit score depends on a few factors, so any changes to these factors will likely affect your credit score. These factors include:

  • The amount of credit available to you, and how much of this credit you are using
  • Your total current debt
  • Your historical credit repayments
  • The number and frequency of credit searches performed in the past - every time you apply for a credit product you’ll be searched
  • Public records such as the electoral roll

Where can you find out your credit score? There are three agencies in the UK that generate credit reports - Experian, Equifax, and TransUnion. It may come as a surprise to find out that each person does not have a universal credit score. Each agency collects slightly different information about you, so their scores are different. You can view your Equifax score here.

Each lender has a different way of assessing your credit score using a combination of the scores from the credit agency they use, as well as the information they gather themselves. This means that if one lender rejects your application, you may still be approved by another. However, before applying to a second lender, it’s important to find out why you were rejected in the first place. This way, you’ll be able to work out what you can do to improve your credit score.

Why is your credit score important?

The success of your mortgage application will depend on your credit score. A mortgage lender will combine information from your credit score with information you provide in your application to work out if you meet their criteria for mortgage approval.

A credit score allows the lender to work out what sort of borrower you are and the likelihood of you keeping up with mortgage repayments. At the end of the day, a lender wants to know the risk attached to lending you money.

If your credit score is high, you are considered lower risk by mortgage lenders. This is good news since you’re more likely to have your mortgage application approved with potentially better terms. Moreover, you’re more likely to have a wider choice of mortgage options to choose from. On the other hand, you may find yourself with a problematic credit score.

How can you improve your credit score?

Here at Sprive, we understand the importance of a good credit score to help you find the best deal on your mortgage. That’s why we have put together our thoughts on what you can do now and in the future to keep that score as high as possible.

Above all else, pay your bills on time. Your repayment history is important. If you miss a payment it could have a disproportionate impact on your credit score, especially if it happened in the last year. Make sure you don’t miss any repayments on any outstanding debts, including your mortgage, credit card, and other loans. Timely payment of monthly bills such as utilities, mobile phones and insurance are just as important. Setting up direct debit payments for at least the minimum amount on all debts and bills is a good idea.

Don’t forget, it's important to only borrow what you can afford. Missed payments and problems can lead to County Court Judgements (CCJ), an Individual Voluntary Agreement (IVA) or even bankruptcy, which will remain on your record for up to six years.

Limit your credit applications. If you make a number of credit applications in a short period of time, it may suggest that you’re overly reliant on credit and therefore high risk. Whether it is a credit card, loan, mortgage or any other type of credit, each credit check will be recorded on your credit report. Try to avoid more than one credit check every three months and space the credit checks out even further where possible. You can use an eligibility checker tool or “soft” search to limit your credit applications.

Close any unused credit accounts. If you already have a large amount of credit, the lender may think that you cannot afford to repay additional credit. For example, if you have too many credit cards and store cards, it may be an idea to close some of them. However, make sure you still have enough credit. Using less than 50% of your available credit is a sign to lenders that you can manage your credit sensibly.

Keep using your credit card. It is important to have some historical credit activity. When a mortgage lender assesses your credit score, they are trying to predict your ability to repay the mortgage. Without a credit repayment history, the mortgage lender will struggle to make this assessment, which could count against you. One quick way to build a credit history is to apply for a credit card, use it regularly and always make repayments on time.

It is worth reviewing your credit report annually to ensure the information is correct. If possible check with all three credit agencies. When reviewing your report, look out for any fraudulent activity. This could include amounts owed that you are unaware of, or credit applications that were not made by you. Any fraudulent activity can be reported here. Please be reassured that if you are a victim of fraud, the lender will fix the damage to your credit score quickly.

Review any accounts you may share with others and close them if necessary. Sharing credit with another person, for example a joint account credit card, could affect your credit score. The credit agency will review the credit history of the other person on your joint account as part of your credit score.

Register to vote. If you’re not already registered, do so as soon as possible. Registering for the electoral role is important as lenders use it to check your address and ID. Without this information your mortgage application may be rejected. You can apply here.

Lastly, if you are a tenant planning your first home purchase, then here is a great way to build a strong credit history for your first mortgage application. By registering here you can make your rental payments count towards your credit history.

How long can it take to improve your credit score?

Unfortunately there isn't a specific timeline for credit score to update. Taking actions to improve your credit score can take time. The time it takes depends on a combination of two factors.

First, some credit score issues can take longer to solve than others. For example, if you missed a payment, this will stay on your record for up to six years and continue to affect your credit score. Likewise, a lack of credit history takes time to fix. For example, once you’ve applied for a credit card, it takes months of regular repayments before it’ll affect your credit score.

The second aspect is the time it takes for lenders and other organisations to relay information about you to the credit agencies. There is typically an unknown time delay. For example, if you register to vote, this will also take some weeks to filter through to the credit agencies records.

If you’re worried about your credit score, take action today. Once you’ve understood your current credit score, you’ll have the know-how to take action to make improvements if you need to. Your credit score is an important aspect of a mortgage application and needs to be considered early on. Don’t forget, a credit score takes time to improve, so don’t delay.