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Is a good credit rating important when taking out a mortgage?

Posted 20/05/2024 by Robyn Hall
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Is a good credit rating important when taking out a mortgage? In order to have access to the best deals, a good credit rating is key. Let's look at why your credit score is important and how you can manage your finances to have a good credit score. 

How and why lenders care about your credit score

All lenders will use a credit score of some kind to determine the interest rate that they offer to all loan applicants.

Generally, the higher your credit rating, the lower interest rate you’ll be repaying and so reducing the amount you’ll be repaying each month and the overall interest paid over the term of the loan or mortgage.

While a good credit score won’t automatically guarantee you a mortgage or loan application it will go a long way to help it along as it’s a way of proving to the lender that you are both financially responsible and reliable.

While there are numerous lending options available, no matter what your credit score is, a good rating will gain you access to more favourable deals.

If you apply for a mortgage with bad credit, it can take longer than usual as the lender will want to see more evidence of your finances, so they know whether you can make repayments on a mortgage.

With a good credit rating, borrowers often receive more favourable mortgage terms.

This can include lower arrangement fees, more flexible repayment options and potentially lower initial deposits.

It’s also worth bearing in mind that a good credit score can impact the loan-to-value – the amount of deposit you’ll need to put down - of the mortgage deal that you are looking for.

Not only that, but a good credit score will normally speed up and simplify the whole mortgage application process as lenders, in the main, will consider you to be lower risk and so require less scrutiny and additional information when it comes to the crunch.

Without a good credit rating, you might face higher costs and fewer options, making it more challenging to obtain a mortgage that could be more affordable for you.

While it’s important that you have got a good credit rating – it’s not necessarily essential – there will be other factors at play when it comes to securing either a loan or mortgage – such as how much you’re paid, whether you are employed or self-employed as well as your overall financial health and stability.

Checking your credit score

Experian, Equifax, and TransUnion are the three main credit reference agencies and you can obtain a copy of your credit report from either. A lot of digital banking apps now also include a credit checking facility which can also provide some useful tips.

You’ll know in an instant if you’re going to face a potential problem but if you’ve found yourself with a small blip in your credit history fear not – there’s plenty of ways to help improve your rating.

How to maintain and improve your credit score

1. Pay your bills

Consistently paying your bills on time is one of the most important factors in improving your credit score. An easy way to do this is to set up direct debits or reminders to ensure you never miss a payment on regular monthly charges such as a phone bill or your television streaming accounts.

2. Sort out your outstanding debt

Try to pay down any outstanding debts, particularly credit card balances as high levels of debt relative to your credit limit can negatively impact your credit score.

You should also aim to use less than 30% of your available credit limit. For example, if your credit limit is £1,000, try to keep your balance below £300.

3. Register to vote

Registering on the electoral roll at your current address helps verify your identity and can positively impact your credit score.

4. Avoid frequent credit applications

Applying for multiple credit accounts in a short period can be seen as a sign of financial distress. Space out your credit applications to avoid this.

And remember, each application for credit creates a hard inquiry on your credit report, which can temporarily lower your score. Be selective about when and where you apply for new credit.

5. Keep old accounts open

Length of credit history is a factor in your credit score. Keeping older accounts open, even if you don’t use them often, can be beneficial.

6. Mix it up

Having a variety of credit accounts (credit cards, personal loans, phones) can positively impact your credit score, as it shows you can manage different types of credit responsibly.

7. Correct negative marks

If you have missed payments or defaults, try to catch up and pay them off. Over time, their impact on your credit score will lessen, but it’s essential to address them as soon as possible.

If you have any questions about your credit score as part of your mortgage application process, speak to your mortgage adviser

Your initial mortgage appointment is without obligation. We normally charge a fee for our services; however, it is payable only on the submission of your mortgage application. The fee will depend on your circumstances but our standard fee is £549. Complex cases usually attract a higher fee. We will discuss and agree the fee with you prior to submitting any mortgage application.

Please be aware that the information provided within these archives has been pre-published, as of the date published on each article. The information contained within, including references to taxation, legislation, regulation, or any other issues or concerns may no longer apply.

Robyn Hall

UK Property and Finance Expert

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