Why is your credit report important?
Imagine you’re a mortgage lender and you’ve got thousands of people approaching you, all asking to borrow hundreds of thousands of pounds in mortgage funds – getting to know all of these applicants on an individual basis so you can decide who to accept and who to decline, just isn’t realistic… So what’s the easiest way for a mortgage lender to ‘get to know you’ quickly?
Your credit history… By searching one of several credit reference agencies with just a few of your basic personal details, the lender can gather a comprehensive snapshot of your credit history and this will form a huge part of their decision making when considering you as a potential borrower. They will be looking at your overall borrowing history, conduct of your credit accounts and repayment history, whether you’ve had any missed/late payments, defaults, county court judgements, etc – and they will be looking for trends over certain periods of time, percentage of available credit vs. percentage of debt outstanding, and so on. Generally they are interested in the last 6 years of your credit history, although sometimes it can go beyond this… It’s safe to say there is a lot that goes on behind the scenes, but keeping on top of your credit and repayment history is, in my opinion, the most important thing you can do leading up to applying for a mortgage and will only help improve your chances of being accepted.
Imagine you’re going on to Dragon’s Den to pitch a new business idea and you want one of the Dragons to invest in you – you wouldn’t go in to the meeting unprepared and without first spending some time working on your pitch… Think of your credit report as your ‘pitch’, and the dragons as the mortgage lenders – they have to like what they see, otherwise they won’t be interested in taking it any further. We need to be able to draw them in, get their interest and effectively make them want to do business with you.
Lenders will base the amount of deposit or equity they require from you depending on the strength of your credit history – for example if you want to buy a property with only a 5% deposit, they will generally be looking for you to have a very good credit score. It all comes down to risk, the smaller the deposit the bigger the risk, therefore the better your credit profile needs to be. It could be that you apply for a mortgage with one lender based on you wanting to put down a 5% deposit, but if your credit score falls short of their requirements, they often give us an ‘alternative lending proposal’ such as needing to put down a 15% deposit which probably wouldn’t be achievable.
Now if your credit history isn’t the best, there may not be an awful lot you can do to improve it overnight, but there will be things you can do to improve it moving forward. Hundreds of people over the years have asked me how they can improve their credit score, and although it will be different for everyone, there are some main points which will pretty much apply to everybody;
– Check for errors on your credit file – you should go through your credit report with a fine-tooth comb and check there is nothing on your credit history that you don’t recognise or which you feel shouldn’t be there. This could be a credit account you don’t recognise or with a provider you’ve never applied to, it could be a linked address you don’t recognise, or a missed payment which you know full well was paid on time. If there is an issue which needs resolving, you’re better off contacting the provider sooner rather than later as it may take several weeks to be resolved and corrected where possible.
– Get registered on the electoral roll – if you haven’t already, make sure you register on the electoral roll at your current address as this can help improve your credit score. You can register to vote online and it doesn’t take long at all.
– Avoid moving home too often – this isn’t one you’re likely to have too much control over, as most people who have a lot of different addresses in a short period of time are typically in this situation through no fault or choice of their own, but because it has happened out of necessity. Remember though that changing your address frequently can negatively impact your credit score, so if this can be avoided then it can help to live at one address for a longer period of time and this will likely be reflected in your credit score.
– Financial associations – check your report to see if you are financially associated with anyone else. This could be a joint bank account you’ve held with someone for example which would mean you’re financially associated together. The main thing is that you are aware of these associations and if you are no longer involved or in contact with that person, you’re often best to financially disassociate yourself from them by closing or settling the accounts. If someone you’re financially associated with goes on to have adverse credit, this can affect you as well.
– Make your repayments on time – sounds like an obvious one but always worth a mention. If you want to maintain a good score, or work on improving your credit score, then making sure you meet your repayments on credit commitments on time is an absolute must. Being able to show potential mortgage lenders a good track record of making payments on time will bode well for any future applications.
– Credit utilisation – having debts is not a bad thing in itself, sure you might prefer to be completely debt free, but lenders like to see that you are capable of making repayments on time – so if you have no credit accounts, sometimes this can work against you as there is no proof of being able to maintain payments on commitments. It is important to remember that lenders will look at your utilisation of credit though, which is the percentage of available credit vs. debt outstanding. For example if you have a credit card with a £10,000 credit limit and owe £4,000 on that card, your credit utilisation will be sat at 40% on that account. To help improve or maintain a good score, you want to keep your utilisation as low as possible, but preferably below 30%. Try and keep it below this level across all of your accounts if possible.
– Minimum payments – applicable for credit cards or store/catalogue cards… If possible, try and pay back more than just the minimum payment each month, even if it’s just by a few pounds. Some credit reference agencies recognise when only the minimum payment is being made and if this is consistent, it can reduce your score. Try and pay back a higher amount each month whenever possible, even if you’re just adding £5-£10 per month on top of the minimum payment, this will only help.
Once you’ve covered off the above points, you should be well on your way to improving your credit report and maintaining a better score. By doing so, you will be putting yourself in the best possible position leading up to the point of applying for a new mortgage. In the digital age that we now live in, the on-going focus on your individual credit history is not going anywhere – if anything, it will only become even more important as time goes on.
Even if you assume you have a good credit history or don’t believe there’s any reason it should be sub-par, you’d still do well to check it over and if nothing else give yourself peace of mind that everything is as it should be. If you have any questions or want a helping hand, feel free to get in touch. We will do everything possible to help with your mortgage application regardless of whether you have great credit or not!