One of the major factors in not only deciding if you will get a mortgage but also how favourable the terms of that mortgage will be is your credit report. Your credit report is an account of all the credit you have previously held with official lenders, from store cards to personal loans, as well as your past behaviour in regards to how you handled credit.
For a mortgage lender, this is their first line of enquiry when considering you for a mortgage. They want to know you are a responsible, financially competent person, so that they don’t end up dealing with the hassle and expense of a default on your loan. But what are they really looking for, and what can you do to clean up your act?
What Information Is Contained In Your Credit Report?
A credit report is a log of all the credit you’ve received over your lifetime, as well as how you’ve handled paying it back. It’s like a CV for money management, and is an important part of securing credit in the future.
Some of the things your credit report will include are:
- Your address
- Electoral role information
- Financial connections, such as your spouse
- Account information, including defaults, CCJ’s, bankruptcies and IVA’s
Your potential lender will use all this information to formulate what is known as a ‘credit score’ for yourself. They will weigh up the information on your current level of debt, whether previous loans have been settled, and other things like your income and status to come up with a number; a number which reflects the risk you pose to them if they agree to lend you the money.
What might put them off?
There are some things that could scare off your potential mortgage company, even if you’re a non-defaulting, regular payer of credit agreements. These include:
- Multiple lines of credit: If you have several store cards, a personal loan or two, finance on a car, a couple of credit cards and maybe even more, this could be a red flag to a lender.
- Significant joint debt: If you and your spouse or partner have taken out large amounts of credit jointly, this could be a concern for a lender as they might worry you’ll be overburdened if the other party cannot contribute to repayments.
- Only making minimum payments: If you’ve just been repaying the bare minimum on a debt for some time, particularly expensive debt like store cards and credit cards, this could be a signal of being overburdened with credit.
- Multiple credit searches: Every time a lender investigates your credit file, they leave a footprint. Multiple searches with no additional credit will suggest you’ve tried for credit but been turned down many times, which could be an issue for a new lender.
- Ongoing defaults: If you’ve not been paying enough towards a debt, have stopped paying a debt or are now paying a debt management company or debt recovery agency instead of the original lender, this is a significant black mark on your record.
There are other things which can be off-putting, such as not being on the electoral role at your current address, but in the main, the above points are the big no-no’s that your lender will be looking out for.
How can you clean up your act?
The first thing for you to do is to get a copy of your own credit report. This can be down fairly easily by contacting Experian and / or Equifax, the UK’s two main credit reference agencies. In some cases, you may even be able to obtain detailed information online about your current credit status. Most credit reference agencies offer a free 14-30 day trial, so provided you cancel your direct debit in time, you won’t incur any costs. Alternatively, Noodle, part for the CallCredit group, offers a free for life service. As a small agency they only offer a basic credit report, but it’s a great start to see what shape yours is in.
Once you have credit score, start out by checking for errors. It’s not uncommon to find mistakes, for example if you lived with a sibling or parent who had unpaid debts, or even simply your own debts which had been paid but not reported back to the agency. Go through the information with a fine toothcomb, and make sure you’re being represented in the most accurate manner possible.
If you think your credit score is wrong and there is an error on it, you’ll need to contact the lender in question (whether this relates to a loan, overdraft, credit card etc.) and ask them to wipe the error from their file.
Once you’ve made sure the report is accurate, you can start tidying things up. If you have multiple credit lines, why not consolidate everything into a low interest personal loan from your bank? If you’re regularly paying in arrears for something, work to boost up the payment level so you can get back on an even keel.
Sometimes debts may show up that you didn’t even know you had, such as old fuel suppliers owed money, or mobile phone companies left with an outstanding balance. Pay all these off to give yourself the best chance of securing a great mortgage deal.
Even if you are still turned down by your lender, it doesn’t have to mean the end of the road. By improving your credit record and exploring other lending avenues, you could end up with the money you need to buy that house of your dreams after all!
If you would like to discuss any of the contents in this blog post, please give me a call. I can be reached on 01252 759 233 or email firstname.lastname@example.org