Simple advice from Richard Campo, founder and managing director of our recommended mortgage and protection advisers, Rose Capital Partners.
If you look online, there are huge volumes of information on how to improve your credit score in the UK. I am not inclined to go over that same ground or hand out generic advice, however what I have tried to do is capture specific issues relating to mortgages, and outline some of the vested interests from credit reference agencies, which will explain why your ‘score’ is far less relevant than you think.
Firstly, your credit ‘score’ is highly subjective, and I very rarely pay much interest to that until I have read a credit report through in detail. Your score from a credit reference agency is often reflective of the products they can sell you, or ability to refer onto other firms so they can make money from you. Just log in now and see how many ancillary services they are trying to sell you; it’s quite amazing when you see it from that perspective. We often see clients with very high scores that we can’t obtain a mortgage for, conversely, many with a low score which we can easily help.
Also, a bank has the security of a property on a mortgage which isn’t the case with other forms of credit, so they are often more flexible than you would think. Below are some key things to think about, and what action you can take, to build a good credit score to improve your chances of getting the best mortgage possible:
Pay your bills on time!
It goes without saying but this is the biggest factor of your score that you can control. If you have always made your payments on time, read to the next point; if you haven’t, the next part if very relevant to you:
While missing payments, or having more serious issues like Defaults, County Court Judgements (CCJ’s), Mortgage Arears, Bankruptcy etc are never going to help, equally, they are not a show stoppers either. Think of your credit file like your driving licence. You may in the past have had points, or even been disqualified, but after time they fall off, and after 5 years, no matter what has happened in the past, you are considered to have a ‘clean’ driving licence when it comes to getting insurance or hire cars etc.
Your credit file is exactly the same. The longest timeline is 6 years, as any past issues generally ‘fall off’ or most lenders disregard them (after all, we all make mistakes and it’s not fair to be punished forever for them). The same applies for missed payments/Defaults/CCJ’s etc. of 2 years ago or more, which are under £500, as it is purely the lenders risk appetite which determines whether they will lend or not. You’ll be surprised, as with a strong overall profile, most High Street lenders will agree these cases.
Outside of that, you will fit the FCA’s definition of ‘credit-impaired’, and therefore lenders require a specific licence to lend to you. If you fit the below profile, you’ll need to use a specialist lender, but with rates so low, again, you’ll be surprised at how cheap the lending may be or that it is even possible:
FCA definition of ‘credit-impaired’
(a) within the last two years has owed overdue payments, in an amount equivalent to three months’ payments, on a mortgage or other loan (whether secured or unsecured), except where the amount overdue reached that level because of late payment caused by errors by a bank or other third party; or
(b) has been the subject of one or more county court judgments, with a total value greater than £500, within the last three years; or
(c) has been subject to an individual voluntary arrangement or bankruptcy order which was in force at any time within the last three years
Avoid Pay Day Loans at all costs
Did you know, that if you took out a pay day loan within the last 12 months, MOST high street lenders will automatically decline your application? Well now you do, so even more reason to avoid these lenders. This will never show in your ‘score’, but massively affects your ability to get a mortgage. Worryingly, we are seeing more and more people take out these loans for reasons such as – ‘It’s Thursday, I have a big night out planned, but I don’t get paid until Friday, so I’ll just borrow a quick £500 and pay it back on Monday.’ Aside from costing you a fortune, it could also cost you a mortgage. A lot more needs to be done to educate people on this.
Get your address history correct
This is often the most likely cause of being declined for a mortgage in the first instance. It’s a really prevalent issue in London and other major cities; reason being your address format and number of addresses you have. Look over your credit file and pay close attention to the address format (as in, is it ‘Flat A, 1 Street’ or ‘Ground Floor Flat, 1 Street’). Any type of mismatch can mean you aren’t ‘picked up’ by the lender and get an application declined due to a low score or being unable to complete their online ID checks. If this does happen, you’ll have to write to each company – a real pain, but worth it as it could save you a lot of time and money down the line, especially if you only spot it after you apply for a mortgage.
Also, make sure everything is registered to one address. If you have some things registered to your parents, some on your last property and some on your present property, this flags up as a fraud issue with lenders, so again, keep it neat and tidy as this will hugely help. Having more than 3 addresses in the last 3 years can be problematic, but unfortunately there isn’t a huge amount you can do to control that.
Pay off your credit cards in full each month and don’t exceed credit limits
Having credit and maintaining it well hugely boots your score. Perversely, if you manage your affairs so well that you do not need any form of credit, and only have one bank account, you will score low due to the nature of having a small ‘credit footprint’. So don’t get a load of credit cards and rack them up on a trip to Vegas, but do have at least one credit card, pay your expenses each month, then pay it off in full, ideally by Direct Debit so you never forget (this is what I do and it’s just good cash management, as you get a month’s free interest on most cards, and you can sweep your salary into a higher interest account and earn interest instead of paying it. Tip: TSB and Santander have excellent current accounts). Equally, if you go over your card or current account limit, lenders do not look on that favourably; they are looking for good financial management and that never helps.
Do not have too much open credit
Affordability is the key issue within mortgages these days. So, lenders get very nervous if you have 10 cards, with £10,000 limits, that are just sat there untouched. Their concern would be – what is to stop you moving in, going on a spending spree, then going under quickly? It’s also not great management, as more cards just increase the risk or you missing a payment or going over your limit by mistake.
Do not apply for a lot of credit in a short space of time
Much like the above point, lenders will be worried you’ll go on a crazy spending spree post completion of the loan. Also, and partly an urban myth as I have ever only seen this happen once since I started working in mortgages in 1999, the logic goes that if you apply to multiple firms in a short space of time, lenders will start to decline you as they assume you are being turned down elsewhere. This is because lenders can see a credit search, but they can never see the outcome of that application. Perhaps this is true of old credit scoring systems, but things have moved on since then.
Your occupation is a huge factor
Lenders will score very subjectively, so traditional professions such as Lawyers, Accountants, Doctors etc. will always score better than non-professional or non-traditional roles. Trying to explain to a bank that you are making £100k a year as a beard groomer isn’t as easy as you would think. Also, if you have recently gone from being employed, to self-employed it can be hard or even impossible to get a mortgage if it is within the first year. Contractors sit in the middle, and many lenders are more flexible that you would expect and will lend to you based on your very first contact (subject to your overall profile/experience). This is never captured on a ‘credit score’ with a credit referencing agency, but it is a huge factor when it comes to mortgages.
This is quite a large topic, and this list is by no means exhaustive. So, for an accurate assessment of your current situation, or if you have any other mortgage related queries, please do not hesitate to get in touch with one of our advisers and we will guide you as best we can.
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