Credit Ratings

Controlling Your Credit Rating

Credit-score-concept

Credit-score-conceptThe importance of a good credit score when applying for a mortgage cannot be overestimated. You can advance your score without earning large amounts of money because it is your behaviour with credit that matters most. Chance Delgado shows how small changes can improve your credit rating, lifting you out of a high-risk band into one where mortgage offers are likely >>

 

When you apply for a mortgage, your lender will take a reference at one or more credit reference agency to access your personal borrowing history and calculate your credit ‘score’: an indication of how reliable you are at paying back money owed. Ray Boulger, Senior Technical Manager for John Charcol Independent Mortgage Brokers, says: “During this process not all lenders place the same importance on the same things. There is usually a pass mark that you must reach and, after that, you will get a decision in principle to loan you money. Lenders check your score again before they give you the money in case your circumstances have changed: a CCJ, for instance, or large amounts taken out on several credit cards. They may then decide to refuse the loan.”

It’s important to remember that credit cards aren’t the only activity that gets reported to credit reference agencies. Get a copy of all your credit reports from each of the three agencies and check your outgoings: mortgage, unsecured loans, car loans, student loans, etc. There may be something like unpaid gym dues that only appear on one report… and this could affect your score. Components of your credit score account for various percentages and they include: the length of your credit history (15%); your payment history (35%); amounts still owed as a percentage of credit available (30%); how much of your credit is new (10%); and the types of credit used (10%). Scores generally range from 300-850, and potential lenders consider this alongside your employment type, salary, savings and debt-to-income ratio.

HOW DO I IMPROVE MY CREDIT SCORE?
Put all regular purchases on one card every month to a value of 20-30% of your limit
Pay in full just before the due date. Do this at least a year before you intend to apply for a mortgage. That way, your credit card company will consider you a good risk and will be prepared to offer you a larger limit. Credit cards with a limit of £5,000 score higher than cards with a limit of £500.

Pay off all your credit cards and loans before you apply for a mortgage
Being in the black – not the red – shows you as a better risk. High balances negatively affect your credit rating.

Never ‘max out’ your cards
It’s better to spend an average of £500 on a limit of £2,500 (20%) than to average a £500 balance on a card with only a £1,000 limit (50%). Credit scoring favours borrowers with credit utilisation ratios of between 10%-30% per card. If your limit is £1,000 but you are regularly using £500 credit, apply for a higher limit. If you do need to max out your card, remember full payments also score you points on your rating.

Don’t neglect other payments
Club memberships/unsecured loans/dental loans etc.

Register on the electoral roll
This makes you appear a stable citizen, partaking in important decisions for society.

Cancel cards you don’t need
Research shows that consumers who seek many credit accounts are more prone to defaulting.

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