If you are thinking of applying for a new mortgage, then understanding and managing your credit rating is very important. Every lender has its own process for credit rating, but almost all of them use the data held by the UK’s leading credit reference agencies – Experian, Equifax and Transunion.
How does it work
Basically, lenders use your historic credit information to determine your likely future behaviour and in particular your risk of not repaying debt. Almost every lender has a policy called 'rate for risk', meaning that they use the information on your credit file not only to determine whether to lend to you, but also under what terms and conditions and in particular, at which interest rate they will lend. Therefore, simply put, the better your credit file and rating, the cheaper you will be able to borrow.
Based on the information that the credit agency holds about you, it will give you a credit score. Agencies gather data from a number of different sources including;
- Details of your residency from the electoral register
- Court judgements such as CCJ’s and bankruptcy proceedings.
- Information about past and existing credit and payment history shared by various lenders and utility companies.
As the agencies have their own unique way of credit scoring, you will have a different score with each. While you can access the score, it is not provided to mortgage lenders. Instead, lenders access the underlying information held by the credit agencies and use it to undertake their own rating of you.
Check your credit file
If you are going to apply for a mortgage, then you should check your file to understand what information is held about you and correct any errors. You have a statutory right to check the information held by each credit agency. Click on the following links to register and access your records;
12 ways to manage and improve your credit file
Consider the following actions to manage and improve the data held on your credit file;
1. If there is any information held on file that is wrong then seek to have it corrected, especially if it is likely to be detrimental to any future application for credit. Check all addresses carefully to ensure that they are up to date. Remember that when you make a mortgage application the lender will compare the information on the application to the information on your file at the credit agencies. Any discrepancies could be problematic.
2. Check for fraudulent activity on your file. Identity theft is increasingly common, so make sure that somebody else is not fraudulently using your identify to obtain credit.
3. Information regarding defaults, CCJ’s and bankruptcy stay on your file for six years. If you can delay any mortgage application until after this negative data is removed from your file it will almost certainly improve your chances of being accepted for a mortgage on more beneficial terms. If you can’t wait until a CCJ is removed, then consider writing to the credit agency explaining why you fell into trouble and ask them to add a note to your file.
4. Ensure that all bills, loan payments and credit cards are paid on time. Consider setting up direct debits for each of your bills so that you do not miss a payment.
5. The more that you can demonstrate that you can manage credit, the better your credit file and score will be. Use a credit card frequently and pay the outstanding balance in full each month. The more history you can build of managing credit, the more confident that lenders will be about your future behaviour.
6. When you know that you are going to apply for a mortgage, keep all other applications for credit to a minimum in the twelve months beforehand. Details of applications stay on your credit file and a number of different applications for credit ahead of a mortgage application could be detrimental.
7. Keep your credit utilisation low. Your credit utilisation is the amount of credit that you use as a percentage of available credit. For example, if you have £3,000 limit on your credit card and you normally charge £1,000 to it on a monthly basis, then your credit utilisation rate is 33%. The lower that you can keep your utilisation rate, the more beneficial it is seen be the credit rating agencies.
8. If you have had joint credit with another person over the last six years and the other person has a poor credit file, then your file could be equally impacted through a concept called “financial association”. You should close the joint product with that person and ask the credit agency to add a notice of “disassociation”.
9. Do not withdraw cash on a credit card as this is specifically noted on file. This is an expensive way of accessing cash and will make you look “desperate”.
10. Ensure that you are on the electoral register. If you are a foreign national and not eligible to vote in the UK, then send the credit reference agencies proof of residency (such a utility bills) and ask for this to be added to your file.
11. If you currently rent, consider taking advantage of Experian’s rent exchange initiative which allows you to use your on time rental payment to improve credit rating.
12. Cancel unused credit cards, as having too much credit can be detrimental to future applications.
When it comes to managing your credit file, the golden rule is only borrow and spend what you can afford to pay back.
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