September 29, 2020
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Whether we like it or not, lenders make a judgement on us when we want a mortgage.
One of the things they judge us on is how we have handled credit in the past. After all, they are about to give us a whole lot of credit.
To stand a chance of getting on the housing ladder, your credit report has to be pretty good, which can pose a problem for some.
There was a time when people were none the wiser to what their credit report said or what their credit score was.
Now, it's pretty easy to use Credit Karma, Experian or ClearScore to find out.
Let’s clear up the terminology first.
You’ll hear the terms credit score and credit rating used interchangeably. They’re essentially the same information.
Everything you borrow and every repayment you make on the debt affects your credit rating/score.
You might have a credit card or a regular debit one – it doesn’t matter. Bills for rent, insurance, phone contracts, Spotify… practically anything that drips out of your account is classed as credit-worthy information. It tells a lender how good you are at paying back what’s owed.
Missing deadlines, or straying into an overdraft too often, harms your score, while your rating will climb if you pay what you’re meant to, when you’re meant to.
Like I said, mortgages are a whole heap of credit.
With today’s house prices, you’ll probably lay a significant amount of money on the table as a deposit, but a bank must have faith in your ability to cover the rest of the cost of the home (with added interest) over the lifespan of the mortgage, which can run up to 40 years. As a result, credit checks are part of the process.
Every mortgage lender is slightly different, but your credit history gets checked in 2 main ways.
First, when you initially apply and before you get an agreement in principle, the lender will do an automated credit check. Most of these searchers are soft searches, which means the searches themselves do not alter your score or record in any way.
These check your credit history in a general, top level way. They are designed to highlight any red flags, such as bankruptcy.
Secondly, once you decide to go ahead with a specific mortgage deal, you will be subject to a hard credit search, which does stay on your report for other lenders too see, and your report will be assessed in more detail.
This is Mojo's easy-to-use tool that not only checks your credit report (softly) but everything else that lenders look at. It then gives you your own MortgageScore. And unlike with credit scores, we can say that if you score over 400, there's a really good chance that you can get a mortgage from a mainstream lender.
If you have been rejected for a mortgage based on your credit score, the first thing to do is stop applying for a mortgage.
Bouncing from rejection to rejection when you apply for credit can bring your rating down even further. If you continue on this downward spiral, your mortgage chances will get smaller and smaller.
Next you want to consider if there are any silly mistakes holding you back...
This is pretty obvious and straightforward. But because it's obvious and straightforward, many people get bored and don't do it thoroughly.
If a credit reference agency has you confused with someone else (particularly common when you live with family members with the same first name initial) then you may not be being judged fairly.
Equally, check if any failed or missed payments are true. If you can prove they are incorrect or you just want to add a note of correction to the file to explain these, contact both the credit lender and credit reference agency in question.
It’s best to avoid using standing orders to pay bills. If it’s a trusted regular payment – think your rent, phone bill or energy payment – always set up a Direct Debit. Even the most organised person can make a mistake, resulting in a late payment being registered and your credit score decreasing.
Experian, Equifax and TransUnion are the three main Credit Reference Agencies. Every lender/finance provider reports to at least one of the main agencies, so it’s important to check your credit report with as many as possible to find out if there are any inaccuracies.
If you have a joint account or credit agreement with another person, like your partner or spouse, you could be financially linked. This means that if one of you has poor credit, the other person could be affected too. I’ve seen high earners/eligible customers with no previous credit issues be declined due to an association with a partner who has a poor credit score.
There are a number of ways to get round this – savings accounts don’t show on your credit report because you’re not borrowing any money, so you and your other half could open one of those instead. Just be wary of opening an account where you can borrow money, as it could show on your report.
If you find you’re linked to your partner and it’s having a negative effect, you can close the account and get in touch with the credit reference agencies to ask them to remove it. It can take up to 2 months to update your credit report.
Make sure you’re on it, and keep your address updated if you move. Easy.
Remember, your credit score or report isn’t the be all and end all. When you come to apply for a mortgage, most lenders will look at your income compared to your debt to see if they’re comfortable with your existing level of borrowing.
If your debt to income ratio is too high, your application could be declined, even if your credit score is perfect, so make sure you’re borrowing within your means.
You can wait the 7 or 10 years it takes for bankruptcy to fully slip off your credit file.
Or you can try a specialist mortgage lender.
You'll be asked to pay a higher rate of interest, but if you can afford the repayments, it can actually help improve your credit rating over time.
Supposing the score is less than it should be (or non-existent) - how do you make it better?
First, you can try spending a little on a credit card each month, such as £50-£100 and repaying the full amount on time.
Special ‘credit builder’ cards can do the job just fine but be warned: they carry higher than average interest rates. If you fail to pay off the balance in full, you’ll start racking up more debt that could make things worse.
Second, keep any steady payments you can afford whilst ditching those you can’t.
Third, tiny changes can prove a benefit, such as registering on the electoral roll and ensuring your addresses on old accounts are up to date.
Here's a few other articles you may find useful.
Want to see what skeletons are in the financial closet? It's pretty easy to do and can be the difference to getting a mortgage or not.
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