Yahoo Finance How to improve your credit score before buying a house
With lenders increasing mortgage rates and tightening up on their affordability criteria, having a healthy credit score is becoming increasingly important for those wanting to get on the housing ladder.
It's a good idea to become more informed about your credit score prior to seeking a mortgage and begin monitoring and building your credit score before purchasing a new home.
How can you check your credit score?
There are several websites where you can check your credit score by inputting just a few simple details.
The main ones are Equifax, Experian and TransUnion.
“Each agency has a different scoring system, so not only will your credit score likely be a different number with each agency, you could also be classed as having poor credit with one, and have no problem at all with another,” says Polly Gilbert, Tembo.
Read more: How to sell a property in a tricky market
“To get a full picture of your score, we recommend that our customers use a service called CheckMyFile, which collates your credit history from all three agencies.”
Why is a credit score important when buying a home?
A credit score is important when you’re buying a property as lenders use it to gauge whether they want to lend to you and at what rate.
“Those with poor credit scores will likely be offered higher mortgage rates in comparison to those with higher scores,” says Gilbert.
With mortgages becoming more expensive, lenders are being much stricter when it comes to borrowing and looking much closer at credit scores before making their decisions.
“The lower the deposit you have, the stricter the lender will generally be on credit scoring! So, for example if you're buying with a 5% deposit, the lender will be much stricter on your scoring, and credit search, than if you were to buy with a 15% deposit,” says George White, GW Mortgages.
“There is no universal minimum score to secure a competitive mortgage deal, but most, if not all lenders, will have an internal pass mark and if yours falls below this, they’ll likely turn down your application. You’ll get more options and better deals if you have a good score compared to someone who doesn’t, especially right now,” says Experian.
What can affect your credit score?
Credit cards
While you might think not having a credit card at all would be a good way to improve your credit score, this isn’t the case. The key is how you use it.
“If you haven’t one already and you’re at least six months away from applying for a mortgage, consider taking out a credit card and use it for occasional, small purchases, settling the balance in full each month. This can really help if your credit history isn’t the most extensive,” recommends Experian.
Read more: Interest rates: Eight ways you can defuse the mortgage timebomb
Don’t be tempted to run up too large bills though. Experian warns against ‘Revolving Credit Utilisation’, the amount you currently owe on things like credit cards divided by your credit limits.
“For example, if your monthly limit is £1,000 and you owe £100, your credit utilisation is at 10%. Many people think that you can max out your credit card each month and as long as you clear it at the end of the month it won’t affect your score. That’s not the case — if you consistently remain at a high percentage of credit utilisation, this suggests you are reliant on credit and therefore this will probably affect your score negatively."
Adverse credit
If you have taken out loans in the past and failed to repay them — or paid them late, this will impact your credit score.
“Having adverse credit can negatively impact your ability to get a mortgage, as you may have fewer lenders to choose from or be offered higher rates which could make mortgage repayments unaffordable,” says Gilbert.
Think ahead and, if you have debts on loans or other credit, pay down these balances in the months leading up to your mortgage application.
The electoral roll
One surprising thing that affects your credit score is being registered to vote on the electoral role.
“[This] is considered a line of credit, and a route to an address, therefore it can positively impact your scoring,” says White.
Your address
It’s vital that your current address matches all your bank statements and utility bills and that you aren’t registered at too many different addresses.
“The credit agencies like to see a consistent address history so if, for example, you have some old bank account statements still going to a parents address, then change them over to where you reside, so they are all routed to the same address,” suggests White.
Read more: How long should you keep a property before selling?
Minor as it might seem, something as small as having your addresses formatted slightly differently in different places can have an impact on your credit score. Lenders may struggle to locate your full credit history because of this.
Financial links
You need to think carefully about who you are financially linked to, past and present.
“When you buy a house with someone else, your credit scores become linked. This is true if you’re buying with a partner, friend, sibling or parent. If the other buyer has struggled with debt in the past, this could negatively affect your credit score, and vice versa,” says Gilbert.
What’s more, if you have an ex-partner or former business partner, you need to make sure any outdated financial links to them are removed. Otherwise, financial issues they are having may hurt your own application.
Avoid opening new accounts and loans
It’s important not to seem overly reliant on credit in the months leading up to your mortgage application.
Hold off opening any new accounts that involve a hard credit check or entering into any finance agreements for things such as cars.
Read more: Trends that can boost the value of your home
Your mortgage lender might worry that you’ve borrowed some of the money for your deposit from another lender and that will send out a red flag.
Applying for multiple mortgages
Every time you apply for a mortgage, your credit score will be checked, which leaves a mark on your record.
Gilbert warns against applying for multiple mortgages: “This can be seen by other lenders, and can appear like you’re desperate to borrow money, which may put lenders off.”
To make sure you have the best chance of being accepted for a mortgage, speak to a mortgage broker early on in your application.
Watch: What is a credit rating and why does it matter?
Download the Yahoo Finance app, available for Apple and Android.
