For most of us, buying a property is one of the most significant financial decisions we’ll ever make. Hence, it’s crucial to ensure you have a healthy credit score before embarking on this exciting journey. Your credit score is the key to unlocking the door to your dream home. A strong score will widen your access to a range of mortgage products, potentially enabling you to secure better interest rates and repayment terms. In this article, we’ll provide top tips on how to achieve a healthy credit score ahead of your property purchase or remortgage.
Understanding Your Credit Score
Before delving into how to improve your credit score, it’s vital to understand what it is and how it’s calculated. Your credit score is a numerical representation of your creditworthiness, derived from an analysis of your credit report by credit reference agencies. It’s influenced by a variety of factors, including your history of repayments, the amount of debt you currently have, and the length of your credit history.
Regularly Check Your Credit Report
Regularly reviewing your credit report will give you an understanding of your credit score and highlight any factors negatively affecting it. In the UK, you can access your credit report for free via agencies such as Experian, Equifax, and TransUnion. If you spot any errors on your report, ensure to challenge them – this can significantly improve your credit score.
Make Timely Payments
Your repayment history is a major factor in your credit score calculation. Making payments on time, whether it be your credit card bills, utility bills, or any other forms of credit, can substantially enhance your credit score. Setting up Direct Debits can help ensure payments are made in a timely manner.
Keep Credit Utilisation Low
Credit utilisation refers to the amount of credit you’re using compared to your total available credit limit. Generally, a lower credit utilisation rate is viewed positively by lenders. It’s advisable to keep your credit utilisation below 30% if possible.
Don’t Apply for Credit Unnecessarily
Each time you apply for credit, it leaves a ‘hard’ search on your report. Multiple applications in a short period may signal financial stress to lenders, potentially reducing your credit score. Hence, it’s important only to apply for credit when necessary and space out applications as much as possible.
Develop a Strong Credit History
A longer credit history provides a more comprehensive picture of your credit behaviour to lenders. Therefore, if you have old credit accounts that are in good standing, it’s often beneficial to keep them open.
Address Outstanding Debts
If you have any unpaid debts, now’s the time to address them. Having fewer debts will improve your credit score and increase the chances of getting a favourable mortgage deal.
First-Time Buyers and Credit Scoring
Zoopla recently published an article discussing a new credit scoring model that could assist first-time buyers in obtaining a mortgage. The traditional model of credit scoring often puts first-time buyers at a disadvantage because they usually have a limited credit history. This new model takes into consideration a wider range of data, including rental payment history, which could result in a more comprehensive and fair credit score. It’s a noteworthy development, particularly for those struggling to get onto the property ladder.
Don’t Be Deterred by Past Mistakes
Even if you’ve made credit mistakes in the past, don’t be discouraged. Most negative information, including late payments, defaults and bankruptcy, falls off your credit report after six years. Make a plan to improve your creditworthiness moving forward and stick to it.
Avoid ‘Guarantor’ Loans if Possible
While guarantor loans might seem like an easy way to improve your credit rating, they can be risky. If the person you’re guaranteeing fails to make their repayments, you’ll be liable for the debt, which could negatively affect your own credit score.
Register on the Electoral Roll
Lenders and credit reference agencies use the electoral roll to confirm who you are and where you live. Being registered can enhance your credit score and increase your chances of getting credit.
Close Unused Credit Accounts
If you have credit cards or bank accounts that you don’t use, it’s a good idea to close them. Lenders might view access to too much credit as a risk, even if it’s not being used.
Steady Employment and Income
Lenders feel more comfortable lending to individuals with a steady employment history and a regular income. If you’re planning to change jobs, it might be worth waiting until after you’ve secured your mortgage.
While the prospect of purchasing a property can be daunting, taking the time to nurture your credit score can significantly smooth the process. With a healthy credit score, you’ll have access to a wider range of mortgage products, potentially with more favourable interest rates. While it requires patience and discipline, the rewards of a robust credit score are well worth the effort.
By following the top tips in this article, you’re taking a positive step towards securing the property of your dreams. Remember, good financial habits developed today will serve you well long into the future.
