How to improve your credit score for a mortgage?

How to improve your credit score is the most common question when applying for a mortgage. A good credit score is essential when purchasing a home, as it can determine the interest rate you receive and whether you qualify for a loan in the first place. Luckily, there are several steps you can take to improve your credit score in order to secure the best deal possible on your mortgage application. In this article on “How to improve your credit score for a mortgage.” we will explore the topic in detail and try to answer the frequently asked questions such as

How can improving my credit score benefit me?

Reasons your credit score may need improvement

Where can I get a copy of my credit file?

What should I check on my file?

What should I do if I find an error on my credit report?

Improving your credit score for a mortgage

Understanding the relationship between credit score and mortgages

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 explain s 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 that you have managed your debts responsibly, 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

Unearthing Your Credit Score Details

To embark on the road to improvement, one must first know one’s current standing. Sometimes, because of the limited information provided by the credit bureaus, this can be difficult. Therefore, you should obtain a credit report from Equifax to get an accurate picture of your current situation.

Addressing Past Financial Difficulties

Past financial bumps are something many of us face. Financial difficulties might have dented your credit score in the past. It’s not a closed road, though; learn how to mend those dents and build a resilient credit score that stands tall despite past hurdles.

Establishing a Credit History from Scratch

For young adults still living at home, starting a credit history can feel like standing in front of a blank canvas. There is immense potential, and it’s all about taking the right steps.

Rekindling Your UK Credit History

Having spent a substantial time abroad might have paused your financial story in the UK. But worry not, for rekindling your UK credit history is absolutely doable. You can always contact a specialist advisor to help you with your financial situation. 

Detangling from Unfavourable Associations

Sometimes, your credit score can take a hit due to a former housemate or partner’s financial behaviour. It’s time to untangle those threads and reclaim your individual financial identity. Discover how to disassociate your financial history from past relationships and foster a healthy credit environment.

Rectifying Mistakes on Your Credit File

Your credit file might contain errors due to oversight or not updating it for a long time. Learn how to identify and correct these mistakes to ensure your credit file accurately mirrors your current financial status.

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:

• CheckmyFile  Credit Report
• Equifax;
• Experian; and
• TransUnion (formerly CallCredit).

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 for CreditLadder, which will arrange for your rent payments to be communicated to the credit reference agencies.

Next steps

Whether your credit history has a bad dent in it, you are an ex-pat who has just returned to the UK after a long stint abroad, or you 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.

FAQs

How do credit scores affect mortgages?

Your credit score is a key factor that mortgage lenders use to determine your reliability as a borrower. A high score can potentially secure you a more favourable mortgage rate, while a poor credit score might hinder your mortgage application.

What is the role of a credit reference agency in my mortgage application?

A credit reference agency holds your credit report, which entails your credit history including your payment history, debts, and how you manage your finances. Mortgage lenders refer to this report to assess your financial behaviour before making a lending decision.

Can you get a mortgage with no credit history?

Yes, but it might be more challenging. Mortgage lenders generally prefer applicants with a well-established credit history. However, showing regular payments like mobile phone contracts, or direct debit payments can sometimes substitute to show you’re a reliable borrower.

How do lenders make their decisions during a mortgage application?

Lenders consider a variety of factors including your credit score, credit history, outstanding debts, and your income ratio to decide on your mortgage application. They conduct a thorough credit checkA check of a borrower's credit history, which is used by mor... using data from major credit reference agencies to ensure they lend responsibly.

What can your Experian credit score tell you?

Your Experian credit score gives you an insight into your financial health. It reflects how well you have managed your finances and credits over a period of time, which could have a positive or negative impact on your mortgage prospects.

How can I improve my credit score to get a favourable mortgage?

Start by regularly checking your credit report for errors, registering on the electoral roll, and making payments on time to avoid any negative mark on your credit profile. Also, maintaining a low credit card balance can help.

What should I do if my mortgage credit check was poor?

First, don’t panic. Start by reviewing your credit file to identify any credit issues or errors. Consider using a credit builder card to help improve your score over time, and consult with a mortgage broker to explore your options.

Can I check my credit score for free?

Yes, you can check your credit score for free through various platforms offered by major credit bureau entities like Experian, Equifax, and TransUnion. Regularly checking allows you to keep track of your financial health.

How can I reduce my chances of being rejected for a mortgage?

Ensure you have a good credit score by managing your credit card debts efficiently and making repayments on time. Also, having a steady income, a low debt-to-income ratio, and a sizeable down payment can help in reducing the chances of rejection.

How does your credit rating affect the cost of borrowing?

A good credit rating can secure you lower interest rates, which means you’ll pay less over the lifetime of the loan. On the other hand, a bad credit rating can lead to higher interest rates, increasing the overall cost of borrowing.

What is a good practice to maintain a healthy credit score over time?

To maintain a healthy score over time, make credit payments on time, avoid high credit utilisation ratios, and manage your debts wisely to show that you are a responsible borrower. It’s about building a positive financial history step by step.