A couple of weeks ago I wrote about the 3 elements (credit score, affordability, deposit) that will influence your financial credibility and increase the success of a mortgage application. Read the whole post here.
In this post we will look a bit more into things that you can do to increase your credit score. Which is not only important for a mortgage, but for any kind of credit.
Even if you follow all of the advice, your credit score will need a few months to catch up. Therefore it is important to start looking into your score at least 6 months prior to the credit application, better even one year, or *winner regularly once a month as a habit.
What exactly is a credit score?
A credit score is a way to rate your financial behaviour of the past. Do you have debts? Do you pay them back? Are your payments regular?
It represents the risk a lender takes by giving you money. The better you behaved, the higher the score, the lower the risk that you will not pay back your debts.
In the UK, there are 3 Credit Reference agencies: Experian, Equifax and TransUnion. They create and hold your credit reports.
You can check your credit score free on Experian, the biggest provider in the UK. For (currently) £14.99, you can get insight to your credit file. Experian will also let you know what actions you can take to improve the score. If you’re worried about yet another paid subscription, sign up, squeeze the information out and then cancel again in the same month.
Here are the most common ways to boost your credit score:
The information in this list is compiled from Experian, Money Advice Service and Money Saving Expert, some of it successfully used to get my own Experian credit score up to 982.
This list is not exhaustive but covers the main things in my opinion.
Prove where you live
This means: Be on the electoral roll = Register to vote
Being on the electoral roll does not mean you have to vote.
You have to register to vote every time you move.
Don’t miss payments
If you miss a regular payment, even just one, the lender might file a default on your report, which lowers your credit score.
This can stick to your report for up to 6 years.
Payment history is the most important factor of your credit score.
Check your credit files for errors or fraud
Check your credit file for mistakes or fraudulent activity. Someone could use your name to build up debt.
Should you remark this, inform the credit agency and have them set it right.
Make debt and pay it off
This sounds counterintuitive, but in order to get a mortgage (= get into debt) you must have made debt.
Lenders want to see that you are responsible in paying back debt.
The easiest way to do this is by getting a credit card. Even if you (like me) never intended to have one or use it. Get one, use it for £10-20 per month and pay it off right away.
The caveat: Only one!
If you have more than one credit card lenders might get suspicious why they are needed.
Do not change banks all the time
Every time you change bank it lowers your score. It will recover, but if you do that too often it will take longer to catch up. The effect is greater if you at the same as opening a new account apply for a credit card.
Stable relationships are seen as good, but if you find a bank better suited for you, don’t be afraid to change either.
Do not apply for too much credit
Every time you apply for credit (e.g. credit card, car loan) or open a payment account (e.g. mobile phone contract) it leaves a hard inquiry (=lenders checking your credit report) on your credit file. If you have too many hard enquiries, this will lower your score as lenders may be concerned that you have trouble paying bills or overspend.
If you applied for credit and got refused, wait a few months before trying again.
There are also soft inquiries, such as a pre-approval for a credit card. Because they are not linked to a specific application for credit these inquiries have no effect on the credit score, but are mentioned for reference.
Borrow only what you can afford
Not being able to pay back your debts may lead to County Court Judgements (CCJ) or bankruptcy. This can take 6 years to clear off your credit file.
Be careful who you are linked to financially
If you have a joint account with someone with a low credit score, this will affect your score as well. You will be co-scored.
Just living with somebody with a bad score will not affect your score.
Additionally, if you did not have a past in the UK, like I did when I moved here in 2015, you need to build up your score. Get a credit card after one year, use it cautiously as described, and live within your means. It will take you 3 years to build up a decent score, many lenders want to see 3 years of continuous UK addresses.
When we first started thinking about buying, my partner had a very poor score, because he owed £800 to a mobile phone provider. Yes, £800. Only! No CCJ luckily yet! He paid it off and registered to vote, got a new contract which he paid regularly and 2 years later he was in the green.