Home buying is a stressful process and finding out just how much your credit score affects your ability to secure a mortgage, adds an entirely new level of anxiety. Credit scores aren’t just about earning a lot of money or having a specific amount of savings in the bank. In fact, neither of these factors influence your score credit rating at all.
Misconceptions about credit scores, and how to improve them are unhelpful so we are here to discuss how to make your credit rating better.
What Is A Credit Score?
A credit score is a tool used by lenders to help determine whether you qualify for a particular credit card, loan, mortgage or other service.
Using the information on your credit report and any additional supporting information you may have supplied as part of your application, lenders use a mathematical process to calculate a numerical score, which takes the form of a three-digit number, that represents your credit history. This helps to indicate what kind of borrower you are, and how likely it is that you will manage your repayments and how you’ve managed your past debts and bills.
Lenders rely heavily on credit reports because they are a way to predict your future financial behavior based on how you’ve acted previously. There’s no uniform credit score or rating system in the UK; each lender and credit agency scores your financial record differently.
Information held in your credit report may include:
- All your credit agreements, such as loans and credit cards
- All your credit applications
- Your history of credit repayment, including any missed installments
- How much you owe to lenders
- Public records, including CCJs and the electoral roll
These assessments focus mainly on your recent activity, going as far back as six years. All your good, bad, and crazy decisions could potentially form part of your record.
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What Is Not In My Credit Score?
Some of the information that’s will not feature in a credit score is:
- Medical history
- Student loans
- Criminal record
- Council tax arrears
- Parking or driving fines
Never having borrowed money before does not improve your credit score because it makes it hard for lenders to assess the risk of lending to you.
Do I Need A Good Credit Score To Buy A House?
A good credit score really improves the chances that your mortgage application will be successful. A poor credit score may lead the lender to seek more expensive mortgage rates or reject your application completely.
Mortgage lenders just want to be confident you won’t default on your mortgage payments. See our article “Can I Get A Mortgage With Bad Credit” for more info.
Trying to improve your credit score is one of the most useful things you can do to prepare for a successful mortgage application. But it doesn’t stop there. Your credit score affects many things, like whether you can get certain insurance policies, take car finance, and how much interest you pay on your credit cards.
How Do I Check My Credit Score?
In the UK, there are three main credit referencing agencies: Equifax, Experian, and TransUnion. Each uses its own scale for determining what constitutes a ‘good’ or ‘excellent’ credit score:
- Equifax: 420 to 466 is good, 467 to 700 is excellent
- Experian: 881 to 960 is good, 961 to 999 is excellent
- TransUnion: 604 to 627 is good, 628 to 710 is excellent
These scores, which you can acquire from any of these companies websites, are reflective of what each believes is your creditworthiness. You can then check with the agencies to ensure their information on you is accurate.
While your credit score is a useful guide to whether lenders may or may not offer you a mortgage, each lender has its own system for ultimately determining to whom it will lend money. The information that the credit referencing agency holds just helps inform that decision.
The agencies are independent of each other, so just because one might reject you doesn’t mean that others will as well.
What Harms My Credit Score?
It’s very helpful to understand the things that can harm your credit rating. Here are some things that are detrimental to your credit score:
- Late payments
- More than ⅓ of your credit score is payment history, so this is crucial
- Missing payments completely
- An account sent to collections because of failure to pay
- Having an account charged off
- This means a statement by a creditor that a debt probably won’t be paid and so is counted as a loss/‘written off)
- Defaulting on a loan
- Filing for bankruptcy
- Having your home repossessed
- Getting a court judgment against you
- This could be where a court has been forced to step in and order you to pay a late bill
- High credit card balances
- Maxed-out credit cards
How Do I Improve MY Credit Score?
Measures you can take to begin to improve your credit score:
- Regularly check your credit report. Ensure the information is correct
- Never miss a repayment
- If possible, pay more than the minimum each month
- Check any financial links to other people
- The poor credit score of someone you’re connected to financially could harm you, too.
- Register to vote
- Keep your credit utilisation low
- Avoid maxing out your credit cards
- Pay bills by direct debit to reduce the risk of missing a payment.
- Prove you can manage debt
- If you’ve never had a credit card before, get one and use it sparingly then pay off the balance.
- Close unused accounts
- Consolidate debt
- Be cautious about how often and to whom you apply for credit
- Every credit check leaves a trace on your record. Too many could make you look desperate and lacking control.
Note: The Financial Conduct Authority (FCA) has issued guidance on what to do if the coronavirus pandemic has affected your ability to manage your consumer credit repayments.
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