Credit Score

In this episode, we discuss the importance of your credit score and the impact it has on your likelihood of being offered a mortgage. Listen below to find out more.

Hello and welcome to this podcast brought to you by Charles Cameron and Associates. Today we will be discussing the importance of your credit score and the impact it has on your likelihood of being offered a mortgage. I will also be answering some frequently asked questions: 

When you are looking to buy a home, it’s important to have a good credit rating in order to secure a mortgage with a competitive interest rate. Part of the mortgage process requires an assessment of your creditworthiness by any potential lenders. Your credit score shows how well you’ve previously handled your money and financial commitments, including past borrowing, any missed or late credit payments, as well how much credit you are currently using. The higher your credit score, the higher your chance of being offered a better mortgage rate.  

The main credit reference agency used by the majority of mortgage providers in the UK is Experian, while Equifax is used more for unsecured borrowing. The way each agency calculates your credit score differs slightly, so it can be sensible to check your rating with both agencies. Your score is an indicator of your likelihood of being offered a mortgage, as well as what type of mortgage product you’re eligible for. Experian offers a free credit score check to users who sign up on their website.  

Every time you apply for credit, whether it is for a loan, a new mobile phone contract or even to buy car insurance where you will be paying the premium monthly, a credit search will usually be carried out on you. Searches will either be a hard or soft inquiry. Soft inquiries do not leave a footprint and will not affect your score. However, hard inquiries can negatively affect your score by up to 5 points and can take a couple of months to be removed. Therefore, it is important to be mindful not to apply for credit too frequently.  

What is the minimum credit score needed to get a mortgage? 

Since there isn’t a minimum credit score needed for buying a house, the exact score you need will vary depending on the lender. It’s common for credit rating agencies to evaluate credit scores based on five categories: excellent, good, fair, poor and very poor. It’s a sensible idea to check your score and discuss your result with a mortgage adviser who can advise you on the most suitable lender for you. If you have a low score it does not necessarily mean that you are ineligible for a mortgage loan, but you would benefit from understanding all of your options.  

What is considered a good credit score? 

According to Experian, on a scale of 0-999, 881 – 960 is considered a ‘good’ score. Different credit agencies use different rating systems, so what is considered to be a good score can vary. If your credit score is below 881, it’s important to work on improving it as soon as possible.  

In addition to increasing your likelihood of being offered a better mortgage rate, understanding your credit score is also useful for a variety of other financial situations. This includes your chance of being approved for a credit card, or personal loan.  

How to boost your credit score?

Lenders assess many other factors, along with your credit score, to determine your eligibility for a mortgage. Some of these factors include your savings, level and type of debt, along with your salary and other income. It’s important to be able to demonstrate to lenders that you have a history of managing your finances well, and to rectify anything that is negatively affecting your credit file. For example, if you have multiple credit cards with available credit, or if you have a large overdraft arrangement, this may cause concern to lenders, as your future debt could become unmanageable should you draw down on these credit facilities. Therefore, you can minimise this issue by closing unused credit accounts and reducing your approved overdraft limit. 

If you already have a mortgage and are struggling with debt, it’s best to be honest with your lender rather than having unexplained missed repayments. Bankruptcy or County Court Judgements can also have a negative impact, as it takes six years to be wiped from your credit file. It’s also important to keep in mind that having a joint bank account or joint loans can create a financial association between you and the other person, or people. This means their past and future financial behaviour can affect your credit score too. 

It’s important to build up a credit history, as insufficient credit information makes it more difficult for lenders to properly assess your creditworthiness.  

In order to maintain a high credit score, it’s also important to keep up with required payments, as this shows financial responsibility. It’s beneficial to register on the electoral roll at your current address, as lenders use your name and address to validate who you are before considering your eligibility for a mortgage. Therefore, if you have recently been a student and have your banking and other address information recorded at your family home, make sure this is updated before you start applying for any credit, so your financial history is correctly logged. 

It can take several weeks at least for bank account and credit card information to appear on your credit report, so it’s a good idea to deal with any outstanding debts sooner rather than later, as this should start to improve your credit score.  

For more information on how to boost your credit score, read our Knowledge Hub article titled ‘Boost your credit score’.  

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