How to improve your credit score for a mortgage
Whenever you are looking to borrow money or open new lines of credit, any lender is bound to assess the affordability of the loan and your ability to repay it. Those are the rules of the Financial Conduct Authority (FCA) which regulates all such activity in the UK.
Probably the biggest sum you are likely to borrow is for a residential mortgage.
A key benchmark in that assessment of affordability is your credit rating – or “score” as it is sometimes called – which offers the lender a history of the way you have managed debt in the past and whether or not you have defaulted on repayments.
Your credit rating is used as an indicator of your financial responsibility and the likelihood of your repaying any new debt on time and in accordance with your agreement with the lender.
But that credit rating is not only affected by the past management of your debts. If you are young or are an expatriate returning to the UK after an extended period abroad, your credit file is likely to be thin or non-existent – yet still needed to secure a mortgage.
So, how can you improve your credit score before you apply for a mortgage?
How can improving my credit score benefit me?
As an applicant for any type of credit, you need a credit rating that is as healthy as possible. This reassures any lender that you are likely to be an acceptable risk, so that your application is approved, and you are offered as wide a choice as possible of the various borrowing options on offer.
If you have a poor credit history or have yet to establish a credit rating, the credit reference agency Equifax explains why a good credit history is important when applying for a loan.
Improving your UK credit score may give you access to:
- more offers of loans and credit;
- lower rates of interest; and
- higher credit limits.
The higher your score, the better your chances of any lender regarding you as a good risk. It is evidence of your having managed your debts responsibly in the past, without defaulting on the agreed repayment terms. With a higher credit score, mortgages and other applications for borrowing are not only more likely to be accepted but you are also likely to be offered more attractive terms.
Reasons your credit score may need improvement
There are many reasons why your credit score may need improvement:
- financial difficulties in the past may have made a bad dent in your score;
- you are young, still living at home, and haven’t had time to establish a credit history;
- you have been living abroad for quite some time, with no financial transactions in the UK to build up your credit history;
- your credit history is adversely affected through its association with another individual who is no longer living at the same address; or
- you have simply forgotten to check your credit file for a while, and it contains mistakes and errors.
Where can I get a copy of my credit file?
There is no single credit file on all your financial transactions. Different lenders report your borrowing to different credit reference agencies – most of which cross-check the details they hold on you with one another.
You have the right to see and examine your information on any credit file, so it is important to request this from the major agencies in the UK:
What should I check on my file?
Once you have assembled your personal credit file from the credit reference agencies, the first thing to do is to check that all of the information is accurate and up to date.
If there are references to outstanding, unpaid debts that you have in fact already cleared, you must inform the relevant agency or agencies. On the other hand, you may have been living with someone – and, so, financially associated with them and their debts – but no longer do so. Again, you need to update that information.
What should I do if I find an error on my credit report?
To correct any errors or update any information, you must contact the lender or credit provider who supplied the credit and ask them to send you a written “notice of correction”.
Improving your credit score for a mortgage
Once you are certain everything is accurate and up to date, you can start improving on the score you have – whether you are starting from a bad dent in that history or are a young person or expat striving to improve your credit score. Credit reference agency Experian suggests a few of the most important steps:
Get on the electoral roll
- even if you have just moved there or are living at home with your parents, make sure you are on the electoral roll – it is used by lenders as proof of where you are living;
Build up a credit history
- you need a bank account – with a UK bank and in your own name, with regular transactions;
- apply to your bank for a credit card – and use it but make sure to pay off any balance in full each month. This shows you can manage credit responsibly;
Open a small line of credit
- just like a credit card, a prepayment contract for your mobile phone or a store card may also help to show that you pay your debts on time and are financially responsible;
Managing your household bills
- many of your household bills are payable on a regular monthly basis and settling them in full and on time is a great way of demonstrating your financial responsibility;
- your utility bills – water, electricity, gas – all fit this bill very nicely, but if you are renting while looking around for your mortgage, also think about signing up to CreditLadder which will arrange for your rent payments also to be communicated to the credit reference agencies.
Whether your credit history has a bad dent in it, you are an expat who has just returned to the UK after a long stint abroad, or are still living at home with your parents, getting a mortgage may prove difficult. Not least because of a poor or non-existent credit score.
In any of those circumstances, you might want to take expert advice on improving your credit score for a mortgage and in making your application.