Mortgages & Credit Score

Imagine a stranger asked you to lend them some money. How would know they will repay the debt? When applying for a mortgage, a credit score is a number used to gauge your “creditworthiness”. The better your score, the more likely your chances of getting a better deal. Below, we explain how credit scores work and offer ideas to boost your number.

What is a credit score?

Just as you likely would not lend money to anyone, banks need to be careful about who they lend money to. After all, banks are businesses which need to turn a profit. If their borrowers, do not repay their loans, their business model could collapse.

A credit score is a number assigned to each potential customer who applies for credit – e.g. a mortgage or personal loan. Experian is one of the largest credit reference agency in the UK. In 2023, you can find out your credit score by registering on the Experian website for a free 30-day trial of Experian’s CreditExpert service. There are other providers available like Credit Karma that can give you access to this data free of charge in exchange for offering credit products that they will receive commissions for if you buy a product through their affiliate links.

A low credit score means that you will most likely find it harder to find banks willing to lend to you. Or, the lending terms will not be as favourable compared to someone with a high credit score.

Many factors can affect your credit score. A history of missed loan repayments, for instance, almost certainly will drag it down. Here are some ideas to help you improve your credit score and your mortgage approval chances:

Tip One: Pay your bills on time 

If you are regularly late on bills for your phone, utilities and other monthly costs, then this will potentially pull your credit score down. Lenders want to know that you will be reliable when meeting their monthly repayments. So, make it a priority to build up a strong repayment record before applying for a mortgage. One idea is to ask your providers (or bank) to move monthly bills to the beginning of the month or when you get paid, therefore, you can settle your liabilities straight away. Another idea is to set up direct debits to take the money straight out of your account. This way, you do not have to risk not remembering to manually pay providers.

Tip Two: Check your report is correct! 

Just because your credit report says something about you does not mean it is always correct. Mistakes can happen. For instance, credit reference agencies have sometimes reported individuals as deceased when they are, in fact, alive and well! Identity data errors are common – e.g. names and addresses. However, inaccurate payment histories can also be recorded. This could result in you having a worse repayment record than is fair or true. You can always check your credit report online, for free. Read it carefully and dispute any mistakes that you might find. If you get a decision in your favour, give it time for the information to update on lenders’ systems.

Tip Three: Boost your disposable income 

The wider the “gap” between your monthly income and expenses, the more comfortable lenders are likely to feel about lending money to you for a mortgage. Remember, a mortgage is a long-term commitment (e.g. 25 years). Over that time, interest rates could rise and lead to an increase in your monthly repayments.

If so, lenders want to feel confident that you could still pay your mortgage. Before applying, therefore, consider how you can widen your own income-expense gap. One idea, of course, is to try and boost your income (e.g. by getting a pay rise or promotion). However, if you then increase your spending, this may not have any meaningful impact. Another idea is to craft a realistic budget and stick to it. Try and build up some savings – such as an “emergency fund” of 3-6 months’ worth of living costs – and give yourself financial “breathing space” if a sudden, large expense comes up (e.g. a family emergency or a major car repair).

Tip Four: Be wise with credit

Applying for too much credit in a short space of time – such as personal loans – can potentially harm your credit score. If you need to use credit, try and space it out over months or years. Try to keep credit utilisation low (e.g. under 30%). This refers to the amount of credit available to you versus how much you are using. Using a credit card responsibly can, in fact, help your credit score. Whilst having a lot of debts will not do you any favours, it can be a positive signal to lenders if you occasionally use your credit card and always pay it off in good time.

Tip Five: Give it time

Your credit score is unlikely to shoot up overnight, even if you take multiple positive steps to improve it. Credit reference agencies take time to update and notify their partners. If you make good decisions and are patient, then your credit score should gradually improve. You can check it periodically online (e.g. once a month) to see how things are changing. Be careful about closing old, unused accounts. This can undermine your credit score. Also, check that you are registered to vote on the electoral roll – this can boost your number.

The content in this article was correct on 26 July 2023.

You should not rely on this article to make important financial decisions.

Teachers Financial Planning offers independent financial advice on savings, pensions, investments, protection and mortgages for teachers and non-teachers. 

Your home is at risk if you do not keep up the payments on your mortgage. 

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