How Your Credit Score Works (what the credit reference agencies don’t tell you)
How to improve your credit score (and what the credit reference agencies don’t tell you!)
If you look online, there are huge volumes on how to improve your credit score. I have no inclination to go over that ground or hand out generic advice. What I have tried to do in this blog is outline how your credit score works, capture specific issues relating to mortgages, and outline some of the vested interests from credit reference agencies. This will explain why your ‘score’ is far less relevant than you think.
Your credit score
Firstly, your credit ‘score’ is highly subjective, and I very rarely pay much interest to that until I have read a credit report through in detail.
Your score from a credit reference agency if often reflective of the products they can sell you, or ability to refer onto other firms so they can make money from you. Just log in now and see how many ancillary services they are trying to sell you. It’s quite amazing when you see it from that perspective. We often see clients with very high scores that we can’t obtain a mortgage for, conversely, many with a low score which we can easily help. That is how your credit score works.
Also, a bank has the security of a property on a mortgage which isn’t the case with other forms of credit, so they are often more flexible than you would think. Below are some key things to think about, and what action you can take to improve your chances of getting the best mortgage possible:
Aspects you can control
Pay your bills on time!
- It goes without saying but this is the biggest factor of your score that you can control. If you have always made your payments on time, read to the next point, if you haven’t, the next part if very relevant to you:
- While missing payments, or having more serious issues like Defaults, County Court Judgements (CCJ’s), Mortgage Arrears, Bankruptcy etc are never going to help, equally, they are not a show stoppers either.
- Think of your credit file like your driving license. You may in the past have had points, or even been disqualified, but after time they fall off, and after 5 years, no matter what has happened in the past, you are considered to have a ‘clean’ driving license when coming to get insurance or hire cars etc. Your credit file is exactly the same.
- The biggest time-line is 6 years, as any past issues generally ‘fall off’ or most lenders disregard them (as we all make mistakes in the past and it’s not fair to be punished forever for them). The same with missed payments/Defaults/CCJ’s etc 2 years or more ago, which are under £500, as that is purely the lenders risk appetite which determines whether they will lend. You’ll be surprised as with a strong overall profile, most High Street lenders will agree these cases.
- Outside of that, you will fit the FCA’s definition of ‘credit-impaired’ and therefore lenders require a specific license to lend to you. If you fit the below, you’ll need to use a specialist lender, but with rates so low, again, you’d be surprised at how cheap the lending may be or that it is even possible
FCA Definition of ‘credit-impaired’:
(a) within the last two years has owed overdue payments, in an amount equivalent to three months’payments, on a mortgage or other loan (whether secured or unsecured), except where the amount overdue reached that level because of late payment caused by errors by a bank or other third party; or
(b) has been the subject of one or more county court judgements, with a total value greater than £500, within the last three years; or
(c) has been subject to an individual voluntary arrangement or bankruptcy order which was in force at any time within the last three years.
Avoid Pay Day Loans at all costs
- Did you know, that if you took out a pay day loan within the last 12 months, MOST high street lenders will automatically decline your application? Well now you do, so even more reason to avoid these lenders.
- How your credit score works in relation to Pay Day Loans? This will never show in your ‘score’ but massively affects your ability to get a mortgage. Worryingly, we are seeing more and more people take out these loans for reasons like this. It’s Thursday, I have a big night out planned, but I don’t get paid until Friday. So I’ll get a cheeky £500 and pay it back Monday. Aside from costing you a fortune, it could cost you a mortgage. A lot more needs to be done to educate people on this.
Get your address history correct
- This is often the most likely cause of you being declined for a mortgage in the first instance. It’s a really prevalent issue in London and other major cities. Reason being is your address format and number of addresses you have.
- Look over your credit file. Pay real attention to the address format (as in, is it ‘Flat A, 1 Street’ or ‘Ground Floor Flat, 1 Street’). This is a key factor in how your credit score works. Any type of mismatch can mean you aren’t ‘picked up’ by the lender and get an application declined due to a low score or being unable to do their online ID checks.
- If this does happen, you’ll have to write to each company so it is a standardised format. A real pain, but worth it as it could save you a lot of time and money down the line, especially if you only spot it after you apply for a mortgage!
- Also, make sure everything is registered to one address. If you have some stuff at your parents, some on your last property and some on your present property, this flags up as a fraud issue with lenders. So again, keep it neat and tidy as this will hugely help. More than 3 addresses in the last 3 years can be problematic but there isn’t a huge amount you can do to control that.
Pay off your credit cards in full each month and don’t exceed credit limits
- Having credit and maintain it well hugely boosts your score. Perversely, if you manage your affairs so well that you do not need any form of credit, and only have one bank account, you will score low due to the nature of having a small ‘credit footprint’.
- So don’t get a load of cards and rack them up on a trip to Vegas, but do have at least one credit card, pay your expenses each month, then pay off in full ideally by Direct Debit so you never forget. (This is what I do as just good cash management.) As you get a month’s free interest on most cards, you can sweep your salary into a higher interests account and earn interest instead of paying it.
- TSB and Santander have excellent current accounts for this at present). Equally, if you go over your card or current account limit, lenders do not look on that favourably. They are looking for good financial management and that never helps.
Do not have too much open credit
- Affordability is the key issue within mortgages these days. So lenders get very nervous if you have 10 cards, with £10,000 limits, that are just sat there currently untouched.
- Their concern would be – what is to stop you moving in, going in a spending spree, then going underwater quickly. It’s also not great management, as Biggy Smalls used to say “mo money, mo problems”, so more cards just increases the risk of you missing a payment or going over a limit by mistake which isn’t helpful.
Do not apply for a lot of credit in a short space of time
- Much like the above point, lenders will be worried you’ll go on a crazy spending spree post completion of the loan.
- Also, and partly an urban myth as I have ever only seen this actually happen once since I started working in mortgages in 1999. The logic goes that if you apply to multiple firms in a short space of time, lenders will start to decline you for a loan as they assume you are being turned down elsewhere. (Lenders can see a credit search, but they can never see the outcome of that application). Perhaps true of old credit scoring systems but things have moved on since then.
Your occupation is a huge factor
- Another factor in how your credit score works. Again, lenders will score very subjectively, so traditional ‘Professions’ such as Lawyers, Accountants, Doctors etc will always score better than nonprofessional or non-traditional roles. Trying to explain to a bank that you are making £100k a year as a beard groomer isn’t as easy as you would think.
- Also, if you have recently gone from being employed, to self-employed it can be hard or even impossible to get a mortgage if it is within the first year.
- Contractors sit in the middle, and many lenders are more flexible that you would expect and will lend to you based on your very first contract (subject to your overall profile/experience). This is never captured on a ‘credit score’ with a credit referencing agency, but it is a huge factor when it comes to mortgages
They are really the big ones as we see them. It’s quite a large topic, and this is by no means exhaustive. So for an accurate assessment of your situation, I would talk to one of our advisers and we will guide you as best we can.
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