In the excitement of planning to buy a property or remortgage an exist one, it's easy to overlook the importance of credit records. It's also a mistake. A poor credit rating is likely to translate into a rejected mortgage application. The result may then be two-fold: you may lose a purchase you've already set your heart on while also seeing average sold property prices rise further.
However, what are credit ratings and why are they so important?
Credit ratings are a numerical value that act as a shorthand for financial lenders determining whether or not to extend credit to you. This credit may take many forms but loans, hire purchase agreements, mobile phone packages and, of course, mortgages, are among the most common.
From a financial institution's perspective, lending any sum of money carries a risk. In other words, the lender cannot be certain that you will repay the full sum of money, plus interest. Lenders may mitigate this risk by attaching conditions to credit, such as requiring you to provide something - often property - as security. With mortgages, the mortgaged building itself acts as security but even this is not entirely risk free as anyone who has experienced negative equity or plunging sold property prices could explain. This is why credit ratings are so important. Your credit rating is attached to a record of your credit history, which, in turn, details pertinent financial information. As a general rule, individuals with higher credit scores will find it easier to access a greater variety of financial products and, crucially, lower interest rates. Credit scores can even be relevant to some job applications in the financial services sector.
Boosting your credit rating can make the difference between a successful mortgage application or a return to the drawing board. Here are ten tips to improve your credit score.
1. Know what's in your credit file
Your credit file should not contain any surprises. Check it before you so much as think about applying for credit of whatever type. If the file contains any inaccurate information, report it to the relevant financial institution and get the error remedied.
2. Make sure you're on the electoral roll
Credit agencies use the electoral roll as a way of verifying your identity and of confirming that you actually live where you say you do. Being on the electoral roll almost always improves your chances of being offered a mortgage or other credit.
3. Try not to change address too frequently - and don't switch bank accounts without good reason
This can be tricky, particularly if you are young, in employment that requires frequent location changes, or are currently reliant on rental accommodation. However, most lenders find it reassuring if you've stayed at the same address for a reasonable period of time and credit scores tend to reflect this. Similarly, staying with the same employer is also a plus point for many lenders. Finally, just as staying at the same residential address and with the same employer can have a positive effect on your credit rating so, too, can remaining loyal to the same bank account.
4. Close unused credit accounts
Many of us have access to more credit than we actually use. If your credit account reveals that you have credit cards or store cards you neither use nor anticipate needing, it is sensible to close them down. This is because, when determining what you can borrow, lenders may take into account the credit you have access to as well as the credit you are actually using.
5. Pay off debts
Although it's easier said than done, paying off debts - or as much debt as you can manage to tackle - tends to indicate fiscal responsibility to prospective lenders. Conversely, you are more likely to be seen as a bad risk if you only ever make minimum repayments.
6. Watch out for late repayments
Late repayments or, worse, missed repayments may remain on your credit file for up to six years. To lenders, they are a sign that you may not repay future borrowings. Try to avoid missing any repayments by setting up a direct debit to ensure each payment is made in a timely fashion. If you believe a late or missed payment occurred due to matters outside your control, try contacting the credit provider to explain the situation. They may be willing to alter your credit record to reflect your explanation.
7. Check your "financial links"
Your credit history may reflect the credit rating of anyone with whom you have been previously financially linked. Their poor credit rating may drag yours down. This may be unavoidable if your financial relationship subsists, for example because you're married to that person. However, if you have separated from them or, indeed, if the relevant financial product is no longer linked to both of you, make sure you disassociate yourself from the other person by informing the credit reference agencies of the current situation.
8. Build your credit history
You'll find it difficult to get accepted for a mortgage if you have little or no pre-existing credit history. Taking out a credit card and using it responsibly (which means making a few purchases on it and repaying the balance in full by direct debit every month) will help demonstrate to a lender that you are responsible and prudent with credit.
9. Repair your credit with a prepaid card
You may be able to tackle a poor credit rating with a credit builder prepaid card. You don't need to pass a credit check to get one because you don't actually borrow on it. Instead, you pay a small monthly fee for a fixed period of time - and these successful payments are recorded on your credit file.
10. Don't make lots of credit applications in a short space of time
Every credit application you make leaves a "footprint" on your credit file that's visible to other searchers. Evidence of multiple applications over a short period of time - regardless of whether or not they were accepted - makes you more likely to be rejected when applying for future credit. Particularly when it comes to property purchases, it's prudent not to make other credit applications within six months of applying for a mortgage.
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