Experian expert, Joe Green, answers your credit-related questions
Emergency credit card
I have a credit card, which I keep purely for emergencies. I am a first time buyer and I have recently seen a home that I am very interested in. I am now going to try and get
a mortgage, but a friend told me that having a credit card, which I don’t ever use, could have an impact on my credit rating and therefore I might not get a mortgage. Could you advise me if this is true and, if so, what I can do about it?
Your ‘emergency’ credit card could certainly come in handy, especially if you’re suddenly faced with an unexpected expense and aren’t able to fall back on your savings. Although the impact this card is having on your credit rating will depend on the policies of any new lender you approach, it is likely to be positive and here’s why…
If you are keeping to the card’s terms and conditions and it has been open for at least six months, then it is likely to be helping your credit rating. Lenders like to see a positive track record of responsible credit management. As you haven’t been missing payments on this card, or going over your agreed limit, this should all be positive for your credit rating.
Some lenders also look at your ‘credit utilisation’ – which is a fancy way of saying how much you are using of the credit you have available. We’d recommend using no more than 50% of your credit limit and certainly to avoid maxing out any single account.
Now, as you’ve not been using this card you’re utilisation on it will be 0%, so this is likely to be seen as a positive for credit scoring, so I wouldn’t worry too much about what your friend has told you.
What is a credit report?
I am 25 years old and I don’t know anything about a credit score, or report. My girlfriend and I are moving in together and hope that we might be able to afford to buy a shared ownership flat. My parents are advising us of what do, as they are homeowners, and they told me that a mortgage lender would look at my credit history before they agree to anything. Can you explain what happens and how it all works?
Getting a mortgage is probably the biggest single financial commitment you will make in your lifetime.
Your mortgage lender will probably use a process called ‘credit scoring’ to assess your creditworthiness, which is the likelihood you’ll keep up your repayments. Credit scoring looks at information from three sources. This includes information from your application form, such as salary and employment status, along with information they may already have about you, if you’ve been a customer before. They will also get your permission to review your credit report, to see how you have repaid any credit you’ve used in the past. All this information is scored based on that lender’s policies and rules to give your application a score. It is this score that will help a lender decide if they will accept your application or not.
To give yourself a head start, order your credit reports now from Experian and the other two credit reference agencies and review the information in them carefully. As it’ll be a joint purchase with your girlfriend, suggest she checks her reports as well. Your reports contain information about how well you have managed any credit accounts you have held over the last six years, including credit cards, mobile phone contracts and even some utilities, so you might find quite a few records on there.
Over the limit
I want to buy my first home and, about a year ago, I was advised to take out a credit card so that I could get some credit history. Rather stupidly, I took out several store cards and two credit cards and, instead of being sensible, I have run up quite a lot of debt. I know that I have gone backwards when it comes to buying my own home, but at last I have come to my senses and I am trying to pay back what I owe. My mother has offered to help me and pay off some of the debt, which is really great, but I am wondering if this will make any difference to my credit rating. Could you please advise me of what I should do?
You’re right to say that taking out a credit card can be a good way of building a positive credit history, as this can build some solid evidence to lenders that you’re a reliable customer. These cards will certainly be impacting your credit rating, but it’s hard to say how without a few more details of how you’ve managed them. For example, if you built up unmanageable debts, or strayed over your borrowing limits, then your credit rating is likely to have suffered.
You’re certainly on the right track by paying back what you owe now. If you can afford it, try paying back a little more than the minimum payments each month. Only paying back the minimum on a regular basis could suggest to lenders that you might be struggling.
Details of how you handle credit repayments stay on your report for six years, so it’s important that you try to avoid any missed payments or exceeding your credit limits as this will impact your rating for a little while and could prove costly if you apply for a mortgage in the near future. Lenders check your credit report to assess the likelihood that you’ll pay back on time, so if they spot any negative information this may be a cause for concern. Being too close to your credit limits can also be a negative, so it’s worth keeping that in mind. For credit scoring purposes, we recommend using no more than 50% of your credit limits if you can.
If you want help understanding how credit referencing works and how to improve your Experian credit score, visit experian.co.uk/improve