Posted 29 December 2022 by
Helen ChristieWhen you’re buying a new home, there are a lot of things to consider, but whether your mortgage will be approved is the big one.
Your credit score is something you’ll probably have heard mentioned, whether on a television advert, or through your bank, but it’s something you’ll need to take into consideration when looking to buy a house.
We have researched and consulted with leading experts to put together a guide to help you understand everything you need to know about credit scores...
What is a credit score and why it is important?
Your credit score is something that lenders will use to help them decide whether or not you qualify for a particular product, such as a mortgage or credit card. It is important as it will determine what financial products you can take out, and how much interest you will pay. Your file will include previous credit cards, loans, mortgages, overdrafts and even some utility and phone bills. Your credit score will usually range somewhere between 300-850, though there are different scoring models.
What is the scoring model?
Credit scoring models are statistical analysis used to determine whether you will receive credit, how much, and what your interest rate should be.
There are different scoring models, two of the most common types are the FICO Scores and VantageScore. Both use ratings between 300-850. A FICO Score above 670 is considered to be Good, and a score above 800 is determined as Exceptional. The higher your score, the more likely you are to be granted to credit or mortgage you are looking for, and the better your interest rates will be.
What do agencies use to calculate your score?
- Search, address and linked data - this is the record of other lenders who have searched your file if you’ve applied for credit or financial products, and any people you are linked with financially
- Account data - your financial behaviour on credit cards, loans, bank accounts, utility and phone bills from the last six years
- Electoral roll
- Court records
What is a good credit score to buy a house?
When you’re looking to buy a new home, the minimum score required to buy a house will vary depending on the lender – there is no set minimum score. Each lender will have set their own levels of risk tolerance and criteria. They will also have their own cut-off points for the minimum score they are willing to lend to.
What is an average credit score?
Because there are different scoring models, the ‘average’ can differ. According to Experian in June 2022, the highest average score is found in the City of London (871), followed by Chiltern (859) and Wokingham (858). The UK average based on the Experian credit score as on January 2022 was 759.
What if you have no credit history?
Having no credit score can mean that you are seen as a bigger risk. Although this may seem like it should be the other way round, lenders want to see that you can manage your credit and repay it – if you have previously managed this in the past then you are more likely to be able to do so again in the future, whereas having no credit history means you will be unable to show that you can manage and repay credit.
However, credit reference agencies are starting to use utility bills as part of your history, so if you have direct debits set up to pay off your electricity, or gas, or even a mobile phone contract, these will contribute to your score. Credit scoring is basically used as a way to predict how you will manage your credit in the future, and if you do not have any credit history, then lenders won’t be able to do this.
How can you build your credit file?
The first thing to do, is to make sure you are on the electoral roll, as lenders will use this to check your identity. It might seem frustrating that it is held against you if you have never had to borrow, but there are ways to improve and build your credit score without taking on a lot of debt. Probably the easiest way to do this is to get a credit card. Use it for small purchases each month, maybe up to £50 or so, and repay at least the minimum every month.
Ideally, set up a direct debit each month to pay back at least the minimum payment and you’ll be on your way to building your credit score. Obviously the faster you repay, the less interest you’ll be paying on the credit card, but you could make sure you do the minimum monthly payment by direct debit, then manually pay more each month. By repaying each month, you’ll be showing that you are reliable and able to manage your finances.
How can you improve your score?
Once you have a score, improving and maintaining it is really important. There are a few ways you can do this:
- Make sure all repayments are on time
- Pay off what you can - the closer you are to your limit, the more impact it will have on your score
- Don’t open credit cards that you don’t need
How you can get your credit ready for a mortgage?
If your credit is already good, maintaining it will be key to getting the mortgage you want. Don’t take on any new debt just before applying for a mortgage, including applying for a new credit card. If you are financially linked with anyone else, for example, if you previously had a joint bank account with an ex-partner, or former flatmates, any late payments or debt on their part could reflect badly on you. You need to de-link yourself, and write to the credit agencies asking for a notice of ‘disassociation’. Check your credit score in advance of applying for a mortgage so there won’t be any surprises.
How to check my credit score?
To find out what your credit score is, there are three credit reference agencies in the UK, Experian, Equifax and TransUnion, and they tend to offer free monthly trials, so you can check your credit score. It’s a good idea to check your score before applying for a mortgage.