A credit score is a tool used by lenders to help them determine whether you meet the requirements for a particular credit card, loan, mortgage or service. as well as, the level of interest rates that may be applied.
As an estate agents in Birmingham, we are well aware of the significance that your credit score can have on whether a lender approves of your mortgage application. Therefore, in this article, we will highlight a number of ways in which potential buyers can improve their credit score, with the aim of helping people to apply for a mortgage successfully.
How can I check my credit score?
There are several credit referencing companies available and one of the most popular is Experian. They provide a credit score and report absolutely free and the chart above illustrates how lenders perceive particular scores. But don’t panic if your score isn’t as high as you would like it to be as we have provided several tips below that will help to improve it.
1. Never miss or pay a credit repayment late
This tip is probably quite obvious, but some people might not be aware that by paying just one credit repayment late, it can have a significant impact on your ability to borrow in the future. This is because if a lender notices that you were late to pay a £15 credit card bill, they might not have much faith that you will be able to pay your mortgage on time.
As a result, it is crucial that wherever possible you have direct debits set up to help you to avoid any oversight and ensure that all credit repayments are met.
2. Maintain a low credit utilisation
Credit utilisation refers to the percentage of the credit that is available to you that is currently in use. For example, if you have a credit card with a £1000 monthly limit, and you’ve spent £800, your credit utilisation percentage is 80%. Being close to your credit card limit can be perceived by some lenders as desperation. Therefore, it is recommended that you maintain your credit utilisation at 25% or below.
It is important to bear in mind that if you have multiple credit cards, you may receive an overall credit utilisation percentage that takes into consideration the usage of both cards, as well as, an individual credit utilisation percentage for each credit card.
If credit utilisation is a concern for you, a useful suggestion is to pay off a proportion of that balance earlier in the month to reduce your utilisation percentage. Alternatively, you could request for a higher limit on that credit card, without spending extra on that card, which will also reduce your utilisation percentage.
3. Don’t avoid taking out credit
Our first two tips cast a bad light on credit cards for your credit score. But this doesn’t mean the solution is to not use credit cards altogether. In fact, using credit cards can be a very effective way to boost your credit score, if they are managed correctly.
For instance, a lender wants to see evidence that you can borrow money and pay it back on time. Therefore, avoiding credit cards is actually not perceived favourably by lenders. Lenders prefer that you are able to demonstrate that you can manage credit responsibly and have a credit history that allows them to predict your future behaviour. However, if there is no credit history, they can’t predict your future behaviour and therefore can’t determine how much of a risk it would be to lend to you.
4. Avoid too many hard credit searches
Now that you hopefully feel less hesitant to take out a credit card, it’s crucial that you take this next tip into consideration during the application process. Before agreeing to give you a credit card, a lender will conduct what is known as a hard search to determine the risk of lending to you. This is a full and detailed look at your credit history which leaves a footprint. As a result, other lenders will be able to see that you’ve applied for credit when they conduct there own hard search and will notice if you’ve been refused credit or if you’ve made multiple credit applications in a short space of time which can indicate desperation.
Don’t panic though, there’s quite an easy solution to this. Many lenders and credit card comparison websites such as Compare The Market provide eligibility checkers which conduct a soft search to determine whether you qualify for credit. A soft search is a preliminary check which has no impact on your credit score, and crucially, other lenders won’t be able to see that you’ve conducted the search. Therefore, you get to find out whether you are eligible for credit from as many lenders as you like without any negative consequences if you discover that you don’t meet that specific lender’s requirements.
5. But what if those soft searches state I’m not eligible for credit?
All is not lost if you receive bad news from the eligibility checks. If you have a poor credit score, one way you can rebuild it is through store cards which are much easier to apply for such as from Argos for example. However, ensure that you repay the balance on these cards in full before the statement date to avoid any interest charges.
Additionally, there are companies such as Tesco that provide credit cards to people who are trying to build their credit score if they have been rejected from mainstream providers. However, the catch with these credits cards is that they will charge a much higher interest rate. But this might be a worthwhile option if you have a poor credit score and want to prove to a potential lender in the future that you can borrow responsibly.
Other than taking out credit cards, there are number of other ways that you can boost you credit score. This includes the following:
6. Check your credit history for errors
Along with your credit score, Experian will provide you with your credit history which will outline:
All of your past and present lenders
Details on any late or missing payments
Any defaults registered against you
However, it is not uncommon for credit reference agencies to hold incorrect information. Therefore, if your credit history suggests you made a payment late but you’re certain from your bank statements that you didn’t, get in touch with that particular lender and credit reference agency to ensure this is resolved.
But bear in mind, in some cases it can take months for that information to be corrected on your credit history. Therefore, it’s crucial that you check your credit history well in advance of applying to a new lender especially if it’s for a mortgage because if you uncover any issues with your credit history during the application process, the purchase of the property could be delayed or even fall through.
7. Registering on the Electoral Role
Registering to vote on the electoral roll is a simple and short process that could give you a significant boost to your credit score. By doing so you allow a potential lender to verify who you are and determine that the details you have provided to them are correct.
To register on the electoral roll you can visit the link here.
Please note that if you are already registered on the electoral roll, it is important that you keep the details of your address up-to-date.
8. Demonstrate evidence of stability
It’s always tempting to switch your current account because of the welcome bonuses that banks offer to new customers. However, you should avoid switching bank accounts two or three months before applying for a mortgage because this can indicate instability. The longer you have been with a current account provider allows you to demonstrate stability and that you’re able to maintain a longstanding relationship with them.
9. Monitor your financial links with other people
Any joint financial agreements that you have with other people can have a detrimental impact on your credit score. For instance, you may have had a joint financial agreement with a former partner who goes on to get themselves into debt, make payments late, or miss them altogether. If there is still a financial link between you, their actions can have a negative effect on your credit score as well and on any future credit applications that you make.
To avoid this from happening, you can write to the credit reference agencies to de-link you from that particular person.
In summary, there are many ways to improve your credit score but it is important to remember that some of these tips aren't immediate fixes and may take a few months to have an impact. But it will be worth the wait especially if your aim is to make a mortgage application. Are there any tips that you think should have been included in this blog? Feel free to let us know in the comments section below. And if you are interested in selling or letting your property with an estate agents in Birmingham, or require property management services, you can get in touch with Matthews Estate Agents through the contact details below or via our website.
Tel: 0121 358 0008 (Lines open Mon - Fri 09:00 - 17:30)
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