Your credit score effectively tells lenders your creditworthiness. It displays the amount of debt you have, whether you have missed any repayments or defaulted, and whether you’ve applied for new loans.
The higher your credit score, the lower risk you’re deemed to be. Fortunately, our mortgage advice service and this guide can help you improve your credit score and secure a good mortgage deal.
A credit score is a number between 0-999. The number is calculated by looking at the amount of debt someone has, how long they have held credit, and whether they have consistently repaid on time or not.
High credit scores are essential, lenders see higher scores as an indication of low-risk consumers. In other words, you’re likely to repay the money you borrow. That encourages lenders to give you more and allow you the most attractive interest rates.
Simply borrowing money and repaying it will help your credit score. However, lenders also look at your income and how much debt you have compared to your income. This is known as your debt-to-income ratio. The closer you get to 50% or over, the more your credit score will drop, even if you always repay your debts. Lenders will be extremely wary.
As mentioned, a good credit score means you’re dependable and low-risk, you’ll be offered the most attractive interest rates along with their most favourable terms.
While every mortgage lender has its own criteria which need to be met, the general rule is you need a score of at least 620 if you want to be approved. Over 700 will get you access to the better deals.
For example, if someone earns £50,000 a year and has a credit score of 400, they’re likely to be offered an interest rate around 5.5-6%. The same person, with a credit score of 700, will get a mortgage with around a 4% interest rate.
On a £200,000 mortgage, the payment per month at 6% would be £1,289, over 25 years you’d pay $186,581 in interest. In contrast, with an interest rate of 4% you’d pay £1,056 a month and a total of £116,702 interest over 25 years.
That’s a substantial difference and a good reason to improve your credit score before you secure a mortgage.
There are three main credit agencies in the UK, Experian, Equifax, and Transunion. They each have their own scoring system which makes it hard to give a UK average. The latest figures show the average for each agency as:
You have the right to see your credit score and report whenever you want. The process is effectively the same for all credit agencies:
Go to their website
It’s normal to pay a monthly subscription to get more detailed reports. The report will show each of your current debts and whether you’re up to date with the repayments, have missed one, or have defaulted.
The report confirms your name, address, and date of birth. It also shows whether you’re on the electoral roll and any late or missing payments on old debts.
In addition, it shows any County Court Judgments against you, whether you’ve had a home repossessed, and if you have been declared bankrupt.
It doesn’t show how much money you have, what you earn, medical history, criminal record, or council tax arrears.
If you are borrowing money and repaying it on time and your debt-to-loan ratio is under 36% you’re likely to have a high credit score.
However, if you have a high debt-to-loan ratio your credit score will start to drop, even if you still make your payments on time. Other factors which will affect your score
include:
Just as paying debts on time shows you’re a good risk, failing to pay shows you’re a poor risk. Missed or late payments will cause your score to drop.
If you have a lot of credit cards, even with zero balance, your score is likely to dip. This is because you could suddenly increase your borrowing by maxing out all your credit cards. That makes it risky for lenders.
Every time a lender checks your credit file it’s recorded. If you apply for a lot of loans there will be a lot of searches on your file, even if you only borrow with one. To lenders, it looks like you’ve been applying and turned down for loans. This lowers your appeal even if it doesn’t change your credit score.
In addition, young people often have little credit history. This will give you a low credit score as lenders simply don’t know enough about your repayment habits.
The good news is that many of the popular ‘facts’, such as those below, about credit scores aren’t true.
The simplest way to improve your credit score is to check it regularly and address any errors quickly. You should also pay your bills on time and make sure your debt-to-loan ratio is under 36%.
If your credit score is low you can quickly boost it:
In the long term, you’ll be able to improve your credit score by paying down debts. Your main aim should be to keep your borrowing repayments under 30% of your income.
There are several things you can start making a habit which will help you get and maintain a high credit score. It’s not as difficult as you think!
Adopting these habits will help to ensure you have a good credit score, giving you access to the best mortgage deals regardless of your earning level. It also helps to ensure you always have access to finance, should you ever need it.
Naturally, it’s important to stay abreast of any changes in your finances and the credit scoring system. This will allow you to adapt and always be in the best situation possible.
Whatever your situation, we can help you improve your credit score and get the loan or mortgage you need. Contact us today for a consultation.
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