When obtaining a mortgage, one factor that impacts the options available to you is your credit score. This is a number calculated by a credit reference agency such as Experian*. It represents the risk taken by a lender when offering you credit. The calculation to determine your credit score looks at how you have repaid credit in the past. Therefore in order to have a credit score, you must usually have had credit in the past.
If you do not yet have a credit history or if your score is low, you may wonder if mortgages will be available. The good news is, in most cases there will be a mortgage deal for you. However it may impact the type of deal available. In this article we’ll discuss what can cause a low credit score, plus how you can improve your score.
What can be the cause of a low credit score?
Those with a low credit score may have something on their credit file that poses a risk to lenders. These include:
- high levels of debt. This may be in the form of credit cards, car loans, or store card accounts
- missed payments on previously obtained credit
- regular or multiple missed credit payments resulting in a defaulted payment
- declarations of bankruptcy or CCJs
- applying for credit too often, whether successful or not, or frequently opening new accounts
- spending a high proportion of time close to your credit limit on different accounts
Some of these factors could present you as a high risk of being able to repay lent money. Others may position you as having significant reliance on credit. But will they impact your ability to get a mortgage?
What a low credit score means for your mortgage offer
The first thing to know is that there are mortgages available, even if you have a low credit score. This is also the case if you have no credit score at all. However, it may mean you are able to borrow less and/or at a significantly higher interest rate. This is to lessen the risk to the lender. A higher deposit may be required, lowering the loan to value ratio.
Some lenders may not base their decision solely on your credit score. They may look at your present financial situation, as well as considering your financial past. For this, additional evidence of your current financial circumstances may be requested. Lenders may ask for a guarantor as a way of lessening the risk they’re undertaking.
As different lenders have differing criteria for offering mortgages, the process can be confusing and overwhelming. The team at Bell Mortgage Solutions work with specialist lenders who are sympathetic to those in your position. We will remove the overwhelm by speaking to lenders on your behalf, presenting you with viable options. We can obtain a mortgage in principle on your behalf, which gives an indication (though no guarantee) that a mortgage deal will be available to you. This agreement can be used to assure sellers’ estate agents of your financial position. Contact us to discuss your requirements.
How to improve your credit score
If you don’t yet have a credit score, or if the one you have is not perfect, don’t worry. There are steps you can take to improve your credit score, including:
Inclusion on the electoral register
This acts as a confirmation to lenders of your identity and address.
Correct mistakes on your credit record
For example typos in your address, or reporting any fraudulent activity on your account.
Notice of Correction
This is a statement you can add about a point on your credit file. For example, if a missed payment was following redundancy and wasn’t representative of ongoing finances, this can be noted. Notices of Correction can be read by anyone who views your credit file.
Pay off outstanding debts
Where possible, debts such as car loans or credit cards should be paid off.
Make small payments on a credit card
This will give you some credit history to raise your credit score. However, if using a credit card for this purpose, it’s important to pay it off in full each month. Otherwise, this could be more detrimental than helpful to your financial situation.
Focus on low credit utilisation
Using a small proportion of your available credit is a positive sign to lenders. For example, if you use £500 of an available £2,000 credit, your credit utilisation is 25%. The lower this number is, the lower the risk to lenders and the better for your credit score.
Keep your monthly expenses consistent
This will show financial stability, which is a green flag to lenders.
Avoid applying for credit 6 months before a mortgage application
Searches that are undertaken for credit applications will show up on your credit file. If there are too many of these searches it may appear to prospective lenders that you are reliant on credit.
Request a financial disassociation
Should you have previously had a joint credit arrangement with someone, your credit scores are linked. If they have a poor credit score, this can impact yours. A financial disassociation can be requested from credit reference agencies, which effectively breaks this link.
How Bell Mortgage Solutions can help you
If your credit file is not perfect, it’s true that you may struggle to secure a mortgage deal from high street lenders. Our team will be able to help you, though, even if you’ve been rejected for a mortgage in the past.
Contact us to see how we can help you.
Please note: Your home may be repossessed if you do not keep up repayments on your mortgage.
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The information contained within was correct at the time of publication but is subject to change.
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