Your credit score plays a pivotal role in determining whether you’ll be approved for a mortgage and what interest rates you’ll be offered. A higher credit score can open the door to more mortgage products and better terms, while a lower score might limit your options or result in higher costs over time. If you’re planning to apply for a mortgage, it’s crucial to take steps to improve your credit score before submitting your application. Here’s how to do it.
1. Understand What Your Credit Score Means
In the UK, credit scores are calculated by credit reference agencies such as Experian, Equifax, and TransUnion. These agencies collect information about your borrowing and payment habits from lenders and utility companies, and they use this data to assess your creditworthiness.
Credit scores generally range from:
- 300 to 579 (Poor)
- 580 to 669 (Fair)
- 670 to 739 (Good)
- 740 to 799 (Very Good)
- 800 and above (Excellent)
While different lenders have their own thresholds, aiming for a Good or higher score will give you the best chance of securing a mortgage with favorable terms. Before you begin the mortgage application process, check your score with one of the credit reference agencies to understand where you stand.
2. Review Your Credit Report for Errors
Once you’ve accessed your credit report, go through it thoroughly to spot any inaccuracies. Mistakes such as incorrect personal details, outdated account information, or misreported late payments can negatively affect your score. If you find any errors, contact the credit agency to dispute the information and have it corrected. This step alone could give your score an immediate boost.
3. Pay Down Existing Debt
One of the most important factors that impact your credit score is your credit utilisation rate—the percentage of your available credit that you’re currently using. Lenders view borrowers who consistently use a high percentage of their credit limits as higher-risk. Ideally, you want to keep your credit utilisation rate below 30%.
For example, if you have a credit card with a limit of £10,000, try to keep the balance under £3,000 at any given time. If you have multiple debts, paying down high balances can significantly improve your score.
4. Make Payments On Time, Every Time
Late or missed payments can drastically lower your credit score and stay on your credit report for up to six years. Set up automatic payments or reminders to ensure you’re never late on paying bills, credit cards, or loans. Consistent, on-time payments show lenders that you’re a responsible borrower, which can significantly improve your credit score over time.
5. Avoid Applying for New Credit Before Your Mortgage Application
Each time you apply for a loan, credit card, or other form of credit, it triggers a “hard inquiry” on your credit report, which can slightly lower your score. If you apply for multiple forms of credit within a short period, it can signal financial instability to lenders. Avoid applying for new credit, such as car finance or personal loans, in the months leading up to your mortgage application.
6. Register to Vote
One often-overlooked step to improving your credit score is to make sure you’re on the electoral roll. Being registered to vote allows lenders to verify your identity and address, which can have a positive effect on your credit score. If you’re not registered, it’s quick and easy to do so online through the government’s website.
7. Don’t Close Old Credit Accounts
If you’ve recently paid off a credit card or loan, you might think it’s a good idea to close the account. However, keeping older accounts open (provided they’re in good standing) can actually help your credit score. The length of your credit history is another factor that influences your score—lenders like to see a long history of responsible borrowing. Closing an account also reduces your available credit, which could raise your credit utilisation ratio.
8. Consider a Credit-Building Card
If your credit score is lower than you’d like or if you have a limited credit history, you might consider using a credit-building card. These cards are designed for people with lower credit scores and have higher interest rates, but they can help demonstrate responsible credit use. By making small, regular purchases and paying them off in full each month, you can steadily improve your score without accumulating debt.
9. Diversify Your Credit Mix
Lenders like to see that you can handle a variety of credit types. If you’ve only ever had one form of credit, such as a credit card, your score may benefit from having a mix of different types of credit, such as a car loan or a personal loan. However, only take out new credit if you truly need it and can manage the repayments responsibly.
10. Check Your Credit Utilisation Monthly
As your credit score is influenced by your credit utilisation, it’s a good idea to check your balances regularly. Keep an eye on your credit utilisation across all accounts and take action to reduce high balances where possible. If you have the capacity to do so, you could even ask your credit card provider to increase your limit. A higher credit limit with the same balance will improve your utilisation rate, but be cautious not to spend more as a result.
Final Thoughts: Plan Ahead
Improving your credit score is not something that happens overnight. It’s a process that can take several months, so it’s important to plan ahead before you apply for a mortgage. The sooner you start working on improving your credit, the more likely you’ll be able to secure the best possible mortgage rates and terms.
By understanding how credit scores work and taking the necessary steps to improve yours, you’ll put yourself in the best position when the time comes to apply for a mortgage. And remember, if you need help navigating the mortgage process, working with a knowledgeable broker can make all the difference in securing the right deal for your financial situation.
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