Improve Your Credit Score – Get That Great Mortgage Deal
Why Do I Need A Good Credit Score?
Credit Scores or credit ratings as they are also known do indeed effect the rates at which a lender will allow you to borrow money. However it is only one of several factors the lender will consider.
In the first instance you may ask, why do you need a credit score at all? Credit scores are not just used by mortgage lenders they are also used by Landlords when you apply to rent a flat, if you want a credit card or a loan. Not to mention that some potential employers will also look at your credit score as a measure of your suitability for certain jobs.
Therefore a good credit score will be seen as a measure by a lender that you are likely to be a good credit risk. They will, along with other factors, use a credit score to determine, how much they will lend you and at what rate. As a consequence of having a poor credit score some lenders will only offer a higher than average rates. Additionally, in some instances, it may prevent you from being able to borrow money from certain lenders.
How Is My Credit Score Decided?
First things first, when you check your credit score how do I know what is a good Credit Score?
Three of the credit scoring agencies, probably the most commonly known, are Equifax, Experian and Transunion:-
- An Equifax score of more than 420 out of 700 is considered to be a good score.
- An Experian score of 880 out of 999 is also considered good.
- Finally, a Transunion score, which sits in the middle, with a good credit score reading in at 628 out of 710.
If you look up your score and see that it is below these figures don’t despair there are many things you can do to raise your score.
The way your credit score is made up is by credit scoring company analysing five factors:-
Payment History – This aspect influences around 35% of the scoring. This is not surprising as it is a clear indicator of your ability to pay. Late payments can be described as, payments made after the due date, missed payments, a collection agency calling and the most negative one being bankruptcy. Any of these or any combination will affect your credit score negatively. Furthermore any recently unpaid bills will also reflect badly on your score.
Total amounts owed – The influence of this factor is 30% of the total scoring. If you have large or multiple borrowings you will be seen as a higher risk and your score will be adjusted downward. In addition, beware of falling into the trap of borrowing more money to pay off debts, as a result of this type of borrowing a negative factor will be built into your credit score. The ideal ratio for borrowing is to keep the level of available credit and your actual borrowing to around a figure of 35% of the total available to you.
Length of credit history – The weight of this factor is 15% of the overall scoring. This is viewing the patterns of your payments. Therefore, never having missed a payment is a great asset in the building up of a good credit score. In addition to the other factors, if you have a great overall payment history the lenders will see you as a good risk as “passed performance is an indicator of future behaviour.”
New credit being sought – Of the final 20% this provides 10% toward the score, the more applications made the greater the need to borrow more money will be seen, not only that but the more recent the applications the more of a negative impact they will have.
Types of credit being used – this element completes the picture to the lender, in deciding your final credit score. Taking out different types of credit, such as rolling credit (a credit card) and installment credit (a repayment loan) will allow the rating firm to see that you have been offered both easier credit and more difficult credit. As a result of this information there will be a positive effect on your credit score.
Which Actions Can Improve The Score
There are a whole host of alternative ways you can improve your score, some ways are quicker than others but added together will put your score back on the right track.
- One of the more obvious things to do but is often overlooked is actually read through the credit information you receive from the credit rating company. More often than you think they are incorrect. If you find an error you have the right to ask for it to be corrected or removed. In the event of incorrect details being found and then removed there could be an instant improvement to your score.
- If you do not agree with any details in the report, say for example you find a late payment detailed and you know it to be incorrect, raise the issue by disputing the details. The agencies are under a legal obligation to investigate and must remove any incorrect information.
- Ensure that any late payments are made up to date. Likewise if your are over your credit limit make a payment and bring it down to the agreed level.
- If you have an over all credit limit with either one card or through several credit cards add up the maximum you are allowed to use. So if you have a total limits of £20,000 make sure the amount outstanding is no more than £6000. If you can’t do this request a larger limits this has the same effect of bringing the ratio down to the level the agencies will like.
Other Helpful Ways To Improve Your Score That You May Not Have Thought Of
If you are looking for your first ever mortgage and have shied away from loans and credit cards, you need a credit history. Actually it is a positive move to take out a credit card and use it. Always pay it back in full each time and the easiest way to do this is to have a direct debit which takes the full amount owed from your account each month.
If you have an old account which is still open, for example from when you started your first job and it has a good record, don’t close it. If you no longer use it, start it up again, the further back your financial history goes back the better.
Always make your payments on time, direct debits esure that this is taken care of automatically, so forgetting to make the payment doesn’t happen.
If you have several debts try consolidating them into a fixed repayment loan, this will save you money as fixed repayments usually have lower interest rates.
What Else Will A Lender Look For
Mortgage companies have a fairly set criteria, which they consider when you make your application for a loan.
The bank or building society will want to ensure that whatever they agree to lend you, you will be able to afford to make the repayments and you can, ultimately, pay them back. After the financial crash of 2008 the criteria was radically changed by the Financial Conduct Authority ( FCA ). In 2014 new guidelines were issued.
Mortgage lenders now have to consider several other factors over and above your income.
- Your Employment status
- Any allowances you are paid and how they are paid
- How you’re outgoings affect your disposable income
- Your Credit history
So if you get your ducks in a row you should be able to pick up a great mortgage deal.