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Five ways your credit score can help or hinder your plans for homeownership

Are you hoping to become a homeowner at some point in the future? If so, well before you decide on a location, scrutinise sold property prices or even start saving for a deposit, you should get to grips with the importance of your credit score to achieving your goal. Have a think about the following scenarios.

Living away from home at university

Living in halls or shared housing is many people's first experience of independent living. It may seem a far cry from owning your own home, but it can be excellent preparation for homeownership if you approach matters in the right way. This is likely to be the first time in your life when you have full control over your financial affairs and, if your student loan and/or parental contributions have recently hit your bank account, you may feel positively rich. However, as all the student financial advice services may have already told you, it's essential that you budget. Tipping over into an unauthorised overdraft or going beyond your agreed overdraft limit can have long-term consequences for your credit score. Similarly, be wary of "buy now pay later" schemes; missing their payment deadlines can result in late fees as well as adversely impacting your credit score.

All of this said, it is often a prudent step at this stage of life to ensure that you have at least one well-managed form of credit. This might be a credit card that you use judiciously (as a rule of thumb, try not to use more than 30 per cent of your credit limit) and pay off in full every month, or even a contract mobile phone. The reason for this is because individuals with no credit history can subsequently find obtaining large streams of credit, such as a mortgage, as difficult as someone with a poor credit history.

When at university, you should also ensure that you are registered on the electoral roll. If you're uncertain whether to register at your parents' home or at university, you may wish to investigate whether you can register in both places. However, if you are entitled to do so, you will only be eligible to vote once.

Living at home with parents

Perhaps you're in your first job after leaving school or university but, rent either is not affordable or you have the option of living at home to help you build a pot of money for your deposit. Whatever the reason for you living at home, it can be easy to regard this time as dead time in terms of boosting your credit score. However, this is absolutely not true. While your name may not be on any of the household bills, as an absolute minimum you should ensure that you are registered on the electoral roll. If you're not certain whether you are, contact your local electoral registration office via the website.

As discussed above in the section on living away from home, you may also wish to consider taking out a credit card and using it sensibly to help boost your credit rating. At first, you are unlikely to be eligible for the cards offering the best interest rates, longest repayment periods or other perks but, over time, as your credit score improves, you should find that the choice of credit available to you widens until it eventually encompasses a good variety of mortgages.

ID fraud

Sadly, ID fraud of all kinds is increasing. Everyone is vulnerable to a greater or lesser degree, but there are positive steps you can take to reduce the risk of becoming a victim. Your credit record, and your own familiarity with it, is key to this process. As a first step, you should ensure you know how to access your credit record at all three of the main UK credit reference agencies: Experian, Equifax and TransUnion. You do not need to pay to access any of them. You can access your Experian report via the MoneySavingExpert credit club, Equifax via ClearScore and TransUnion via Credit Karma. Next, make a point of actually checking each of them every six months. This might seem like an unnecessary hassle but: (1) you don't know which of the three agencies a prospective lender might use; and (2) six months is a long time to a fraudster. You should always check that your basic information (name, address and financial associations) are correct and that you are recorded as being on the electoral roll. However, you should also watch out for unexpected entries on your file, such as searches made against your file as these can be the first indication that a fraudster is at work.

Renting a home

Although many landlords and managing agents expect to carry out credit checks on potential tenants, few actually return the favour and report (to credit reference agencies) relevant information that might help those tenants build their credit files. If you have the chance, it's always worth enrolling in a rent payment scheme as the landlord or agent will then report your (hopefully on time) rent payments to at least one of the three main credit reference agencies.

Climbing the career ladder

It's natural to want to climb the career ladder for professional and financial reasons. A higher paying job may make the prospect of homeownership more viable or take you into a bracket of higher sold property prices. However, this almost inevitably means occasional (or even regular) job changes and perhaps also periods of self-employment or freelance work. Provided you are moving in the direction you want to be going in, this is all to the good. However, it is always worth bearing in mind the effect that job changes can have on your mortgage prospects. For understandable reasons, lenders tend to value stability in employment almost as much as a large pay packet. When applying for a mortgage, you'll need to be able to prove your income and this is very difficult if you have changed jobs a lot or if you have not been in your current position for at least six months or so. However, a good credit record will help you weather the effects of job changes more easily than someone whose credit rating is less solid.

Self-employment, particularly when it results in income that is highly variable or seasonable, can be a particular challenge when searching for a mortgage, no matter how good your credit record. Utilising the services of a specialist mortgage broker can make all the difference in these circumstances.

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Source: 13.11.19

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