Updated: Sep 14
If you are a first-time buyer, you may be asking yourself ‘what is credit score?’ and that’s a valid question, because chances are, you probably haven’t really been taught about your credit score or credit history at all. There’s also a chance you do know what a credit score is, but you don’t really understand how to improve it, well that’s where we come in.
So, what is a credit score?
Simply put, your credit score is a number which is generated from your credit behaviour over the last 6 years. It is then used by lenders to decide how reliable and likely you are to pay back what you owe (a mortgage, bank loan, Credit card etc…). This number is based on many factors such as the lender being able to confirm where you live (electoral role), past history of being on time with payments, how close you are to your credit limits, the amount of commitments you have and type of credit that you maintain.
The reason lenders use credit scores is because it gives them a feel for how you might act based on six years of past behaviour!
Ways of boosting my credit score
There are many, many ways you can improve your credit score, but it’s important to note that these will all take time, so if you are thinking about applying for a mortgage in the near future it’s a good idea to get started on these months before starting your application.
Get a credit card
You might have been told by a parent or teacher to never get a credit card because they’re ‘evil’ and can cause you to get into tons of debt. Sometimes that’s true but if you can manage this it can show a lender that you’re able to have credit and be responsible enough to manage it. It’s likely that your first credit card may only have a £200 limit but used responsibly, spending £50 a month, and paying it off by direct debit will show you’re able to maintain a credit commitment.
Make sure everything is on Direct Debit
Sometimes you might miss a payment from time to time, if everything was setup on direct debit will mean that you’re less likely to ever miss a payment, you can also set it up so that payments come out at the same time every month meaning you’ll know when to expect them.
Change from PAYG to a contract phone
If you’re a first-time buyer and you have a PAYG (Pay As You Go) phone you may not have any outgoings on your credit file at all. A contract phone will show that you’re able to make regular payments.
Get on the electoral roll
Get on the electoral roll – This is very simple to do and makes life a lot easier. If you are ineligible, you can add a note to your credit file that says you have other proof of address/residency. Go to https://www.gov.uk/register-to-vote to register or check if you already have.
Close unused credit cards
Having multiple unused credit cards is seen as negative because you could potentially have the ability to borrow large sums of money with having another credit check. As soon as you finish paying off a credit card and you have stopped using it you should contact the card company and ask them to shut it down. It also means that you may have less issues in the future with fraud, these accounts can’t become fraudulent is they’ve been closed.
Get the timing right
Some lenders only take into account the last 3 years credit history and some will look at the full 6 years. After 6 years most credit blips will drop off so sometimes it’s best to start with this in mind. Presenting you credit report to a competent broker will mean they can explain it to you and let you know your next steps.
Don’t withdraw cash using a credit card
Lenders don’t like to see this; some lenders charge a massive premium for taking cash from a card, from a potential lenders point of view it looks desperate, it’s expensive and it looks as though you can’t live within a budget and you’re desperate for quick cash. When a potential lender looks at this it may not be overly happy.
Being close to your Credit Limit
For example, if you have 2 credit cards and both have a £2000 limit, and you have £1900 on one card and £100 on another the card with £1900 / £2000 limit will cause concern as you are almost at the limit of your borrowing which will mean your score is likely to decrease. Restructuring the debt to show that you have two lots of £1000 against a £2000 limit will mean less cause for concern.
Number of Credit Checks
The credit scoring system in the UK has a failsafe mechanism built in. If a number of credit checks are applied for in a short space of time your score will decrease, as more and more accounts are opened your score is likely to get to a point where you can no longer get any credit. It’s designed so that should someone steal your financial details and try to open up 3 credit cards, 2 loans, 4 mobile phones, 3 pay day loan companies your score will drop down so low that no further accounts can be opened.
On a much smaller scale, having multiple credit checks for mortgage searches which coincide with renewing your car finance, obtaining new credit cards etc will cause (on a smaller scale) for your score to drop down. If the new accounts are all genuine, don’t worry after a while it’ll start to creep back up.
Pay day loan lending can seem desperate!
In the majority of lenders cases if you’ve used a payday loan company in the last year its unlikely they’ll lend to you. Rates for these can be up to 1500% APR and again could look to be desperate.
Get on a Utility bill
Being a first-time buyer means you may be likely to have very little credit, bring jointly on a utility bill at your family home will mean that you’ll start to appear as having paid the bill monthly when a potential lender looks at you.
Check your credit score regularly
Check your credit score regularly – we have previously had clients that received a parking ticket just as they moved house, which ended up being a CCJ, they only found out three years later when applying for their first mortgage!
We would urge you to use CheckMyFile (LINK) as it uses all the credit reference agencies and will help you work out exactly what the lenders are looking for.
But I haven’t got any credit?
Sometimes no credit can be just as hard as bad previous credit. It’s not always about past behaviour, sometimes it can be because you don’t have any credit! A potential lender will have no idea if you’re able to live and manage debt if you’ve never had any before. You may want to look to take a small credit card and just put in a small expense per month that’s paid off in full.
So now you know what credit score is and how improve it, you should be able to get that mortgage you’ve been dreaming about for years. Of course, your credit score isn’t the only thing you need to think about when applying for a mortgage, but it’s something that could get you better rates and more lender choice.
We hope these tips help you to become mortgage happy! You can find more blogs like this every week…