A low credit score – whether caused by adverse credit events in your records, or no credit history to speak of – might not be the be-all and end-all when it comes to getting a mortgage application accepted. But it can make the process more challenging, and may limit some of your options when it comes to which lender and products you want to look at.
The good news is that there are a number of things you can do to show you are a reliable borrower with a responsible approach to credit and bring your score up to scratch, most of which are quite straightforward. We’ve broken these down into three easy stages:
- Deal with the basics
- Put right any issues
- Create a good credit history
Some of the later tactics might take a little work or time to take effect, but the result will be a credit rating that positions you far more positively when you next come to apply for a mortgage (or any other loan). Let’s go through the stages one at a time:
Step 1: Deal with the basics
These are the very simple, everyday actions you can take to prove that you are an accountable and responsible individual, and will ensure you have a strong foundation on which to build a solid credit record. None of them should take too long, and mostly it’s a matter of common sense. If you’ve had any adverse credit issues in the past, we recommend looking at these every year or so, just to make sure all the basics are up-to-date and on track.
Get on the electoral register
This simple but effective measure can make a big difference when it comes to applying for a mortgage. Being on the electoral roll not only shows you are an active member of society but is also a strong verification of your identity and a valuable anti-fraud tactic. You would be surprised how many people are not registered at their current address, or forget to do so when they move house.
Get copies of your credit reports
Contacting the three main UK credit reference agencies – Equifax, Experian and TransUnion – to obtain copies of your credit report from each one used to be a more demanding process done entirely by post and required a small fee to pay. Since the introduction of GDPR rules, companies are obliged to disclose what information they hold on you, and so the process has become easy, accessible and free, mainly conducted online. Each uses a different scoring system, but you’ll be able to see exactly where you stand and where any problems might lie.
Correct any errors
Take a thorough look through each of the reports and make sure they are all accurate. It has been known for one or more of the credit reference agencies to still include debts that have been settled or black marks that should have been removed, or to even have an incorrect address or other details for the querent. If you do spot anything that is incorrect, write to the agency concerned straight away to request that their records be updated and supply supporting documentation if possible.
Changes might take four or five weeks to appear, and you should get new copies of the report at that point to make sure everything is as it should be. It is vitally important that lenders see accurate and correct information about you when they make their credit checks.
Close unused credit accounts
It’s not uncommon for people to have opened several accounts with stores, or to have a few credit cards available just in case they might come in handy at some point in the future. However, it’s worth understanding that lenders will see lines of credit that are left unused as a sign that an applicant is nervous about their finances, and may wonder if you will be a good lending prospect. If you have any accounts like this, close them down and keep your finances as simple and focused as possible.
Once these stages are completed, you should now have a credit record that accurately reflects your current credit situation and shows you are engaged with your finances. The actual entries on your reports will show you in either a good or bad light – evidence of healthy borrowing is great, but any adverse credit events may hinder your efforts to get a mortgage, which brings us nicely onto the next step.
Step 2: Put right any issues
If you’ve experienced financial issues within the last few years, then it could be that there are still some debts outstanding, or other black marks on your files. If you can do anything about these issues, then you should do so in order that you can move on as cleanly as possible to building up a more positive credit history.
We understand that not all issues can be resolved easily – for example, you may need to let a year pass after being declared bankrupt – but it’s worth remembering that the longer ago they happened, then the less weight they will carry in the eyes of lenders, especially if you have taken steps to enhance your credit record in other ways. Here are the typical actions that potential borrowers with bad credit may need to take:
Get payments up to date
A string of late payments on your credit files, a balance due left hanging for a long time or a habit of always waiting until the red bill arrives before settling up can count against your credit score and will make lenders think twice about granting you a loan. Make sure all your regular payments are up to date and set up direct debits if necessary to ensure you don’t miss any in future. A history of always paying bills or repayment instalments on time will stand in your favour.
Settle outstanding debts
Paying off any balances due on debts and loans that are still hanging over your head will help your credit score, especially if they are connected with a CCJ or IVA. If you have multiple smaller debts then it might make sense to consolidate them into one larger loan that you can then manage far more simply, and shows you take money management seriously. Black marks will fall off your credit history after six years but, no matter how historic, lenders will look more favourably on debts that have been settled, so try to clear the decks as much as possible.
Step 3: Create a good credit history
After you have done everything you can to put your finances on a firm footing and tidy up your lines of credit, you can then take proactive steps to enhance your credit records. Anything showing a healthy approach to credit, with repayments handled consistently and on time, will cast you in a good light with lenders.
To create a new pattern of responsible, well-managed borrowing, you need to take out some borrowings to manage. A couple of simple, low-impact examples might be taking out a new mobile phone contract or buying larger household items on a payment plan – which can be helpful initially for people with very little or no credit history – but these will not carry the same weight as a loan from a high street bank.
A few options are listed below. Think carefully before you proceed, and make choices that allow you to keep within your means while you build up a respectable profile.
Get a credit card
While you should not risk getting heavily into debt, smaller scale borrowing through the use of a credit card can easily show that you can regularly take out credit and pay it back on time on a monthly basis. Use it instead of a debit card for your usual regular household spending, and always pay it off on time when you need to do so. This will put a record of regular payments on your file.
If you are new to credit cards, you will probably have plenty of options, but if you have a blemished credit record you may have to take out ‘bad debt’ credit card, or a ‘credit builder’ card. In all cases, never let credit build up on the account. The whole reason for getting a card is to build up a squeaky-clean record of payments, and missing payments will defeat the object of the exercise.
Take out a loan
Much the same as taking out a credit card, this is another method to show you can borrow money and then repay it reliably, predictably and on time, thus building up a record of good behaviour on your credit record.
The only type of loan you must avoid at all costs for this exercise is a payday loan. Lenders regard payday loans as a sign that you have trouble managing your usual household budgets and cannot live within your means. This will count against you in their assessment of your mortgage application.
Open a savings account
In addition to taking out new lines of credit, you could also start a new savings account, and pay into it regularly. Even if you are only able to manage smaller amounts, the fact that you are putting some money by each week or month will show that you are competently managing your cash flow and understand the value of building up some savings as a contingency, or perhaps for a future deposit. This will count in your favour in the eyes of lenders.
Reduce your level of debt
While we have been outlining taking out new lines of credit in the points above, in addition to settling any outstanding issues as outlined in step 2 above, it is worth doing what you can to reduce your level of debt in general, particularly with credit cards that have been taken to the limit. Perhaps also destroy the card to avoid the temptation of further spending. Again, you are aiming to show regular payments towards credit balances, and a reduction of overall debt, in order to improve your credit rating.
Keep on top of all payments
It should go without saying, especially after everything we’ve discussed above, but it is of paramount importance in maintaining a good credit rating to make sure you monitor all your commitments and outgoings and keep up to date with all your payments. Late or missed payments will show up on your credit records and will stay on them for six years.
The easiest way to ensure prompt payments is to set up direct debits or standing orders where possible so that you never need to purely rely on your memory to pay bills or instalments on time. You just need to make sure you have sufficient funds in your bank account to meet them.
As mentioned, the whole point of all these efforts is to create as clean a financial record as possible, so that when lenders come to make their checks you will present yourself as a reliable, responsible borrower. It may take a little work, but with commitment and determination, you’ll be in a far stronger position, even with some bad credit events on your record, than you once were.