Published 06 May 2014
9 Tips to Quickly Improve Your Credit Score to Buy a Home
Lenders are paying increasing attention to borrowers' credit ratings and being below par can either affect the mortgage terms being offered to you, or in extreme cases, deny you the opportunity of obtaining a mortgage altogether. The situation is only going to get tougher with the onset of new legislation taking effect from 26 April 2014 which requires lenders to scrutinise all new mortgage applications in even more detail.
Who carries out your credit score?
When applying for a mortgage, lenders will routinely carry out a credit check which provides them with a breakdown of all historical financial transactions held in your name. This records how much you have borrowed and how you have behaved in relation to your commitments, i.e. are you a good payer and have you paid on time? This check also provides a “credit score”, the level of which forms a key part of the lender's decision-making process. Scoring systems are never published and will differ depending on both the lender and the product being applied for, however as a rule of thumb, the higher the score obtained, the better chance you have of obtaining a mortgage.
Credit checks are carried out through three major credit reference agencies : Experian, Equifax and Callcredit. The agencies all differ slightly in how they grade applicants but all three divide applicants into categories of "creditworthiness". Experian, for example, have grades of "very poor" scoring less than 560, "poor", followed by "fair" and then "good" scoring between 881 – 960 and "excellent" for those who score upward to 1,000.
Specialist Mortgage Advisor Censeo Ltd, guides us through the steps you can take to improve your credit score and therefore improve your chances of obtaining a mortgage.
1) Obtain a copy of your credit report and check the content
The reports can occasionally contain mistakes and either incorrectly show a missed payment or sometimes link two unrelated customers with similar names together. If any information is incorrect you need to get it removed. A copy of your report can be viewed on a free trial basis or by paying a small fee. When you fill in the application form make sure you include all addresses that you have lived in over the past 6 years.
2) Check that you are on the electoral roll
This is used by prospective lenders to check who you are and where you have been living. This can be done quickly by contacting your local council. Not being on the electoral roll reduces your chances of being accepted.
3) Try to pay off existing debts before you apply
If that is not possible at least reduce them by as much as you can. Lenders want to see that you are in control of your finances and can manage your debt by paying back loans on or ahead of time and signifies good behaviour.
4) Don’t miss or make late repayments
Make sure that any loan, credit card commitment or utility bill such as gas, electricity or water are paid on time. Missed or late payments can stay on your credit file for up to 6 years so although appearing relatively small-fry at the time they can play havoc with your chances of obtaining a mortgage.
5) Keep within your bank overdraft limit
Also, preferably keep in credit for at least 6 months prior to applying for a mortgage. Lenders will ask to see between 3 – 6 months of your most recent bank statements and if you have overstepped your authorised limit this is likely to lead to an automatic decline.
6) Get into (little) debt
If you’ve never had credit before, it can be difficult for a lender to assess you. Consider taking out a credit card, make a couple of purchases on it each month and then repay in full within the prescribed time limit. This will help to build a good credit history and will show that you can responsibly manage credit.
7) Close accounts you no longer need
If , on the other hand, you have too much credit available on existing cards this can work against you. Consider closing any accounts you don’t need or use anymore.
8) Avoid any major changes in your financial circumstances before you apply
Lenders want to see a settled financial history so don’t take out any loans or new credit cards shortly before applying for a mortgage.
9) Stay in your job
It’s not always easy, but avoid a job change immediately prior to submitting a mortgage application. Before agreeing to a loan most mortgage providers like a borrower to have held a job for a few months to show that a steady income is being received. Additionally, probation periods are likely to cause lenders concern.
Censeo Ltd, a member of our Mortgage Advisor Panel, comment: "whilst it can be difficult to accept that the "computer says no", you may be able to avoid this by being pro-active and taking steps to improve your credit score in the period before applying for a mortgage. First of all it is prudent to check your records before applying for a mortgage. Each agency allows consumers to obtain a copy of their credit report including a notional credit score for a small fee. This will provide you with a snapshot of how a typical lender might view your application in terms of credit risk."