Take care of your credit score

Save for a deposit? Check. Compare mortgage types to see which suits you? Check. Search for a property (with small garden) in a family-friendly neighbourhood with decent schools? Check. Make sure target home has range of funky independent shops and cafés nearby? Erm, check.

Your checklist for planning to buy a home can be long and – depending on your priorities – sometimes unexpected. But, regardless of your personal preferences for a property, you must make sure ‘check credit score’ is on the list.

Your credit score is an absolutely critical part of any application for a mortgage. And if it’s in bad shape, you could end up paying more for your home loan or even be turned down.

Here’s what you need to know to help make sure it’s an easy one to tick off your checklist. 

Your credit score is a way of working out what kind of customer you might be if you apply to borrow money. It’s used by banks – including us – to try and answer a key question: what’s the risk you wouldn’t be able to pay your mortgage back?

In a nutshell, it’s a rating based on your financial behaviour and how you look after credit such as loans, credit cards, and overdrafts. Your credit history stretching back years is taken into account, as are other key bits of info such as your age, job and any existing financial commitments you have. The higher your score the better as it means you’re more likely to be accepted for a deal.

Apply to borrow money, and the credit scoring will start straight away.

While the actual process will vary between individual banks and lenders, it simply means a slide rule is run very carefully over your personal finances.

Once you fill in an application form, the lender will look at all the numbers and info you provide, such as your age, job, salary and financial commitments.

Next it’ll likely ask for a credit report on you from one of three credit reference agencies – Experian, Equifax or TransUnion.

This report is filled with public records and data about you, and gives a picture of your borrowing. It might typically include:

• Where you live (and have previously lived)
• Credit agreements – such as car loans, credit cards, store cards, mobile phone contracts
• How much credit you’ve currently got
• Your repayment history showing payments made and – crucially – missed over the past six years
• Any County Court judgements against you for non-payment of debts
• Number of times you’ve applied for credit
• Details of anyone you’re financially ‘linked to’, usually a partner (such as a joint bank account or credit card) or friends in a flatshare

This is all then added to your original application. A calculation – or score – is then made by the lender on how much of a risk you might represent.

If you have a poor score, you could struggle to find a lender willing to let you borrow. Or, if you do, you’ll likely discover you may need to pay a much higher rate of interest.

A decent rating isn’t just vital for a mortgage, though. Take care of it and you’ll find it easier to nab a cheap smartphone deal, secure a competitive energy tariff or apply for a personal loan. Ignore it and you run the risk of rejection from any of these – or paying out far more than you need to.

Think of a credit score as your financial reputation which, like all reputations, can take time to build.

And it can be a particular concern if you’re a younger home buyer or first-timer seeking a mortgage. Thanks to their age, younger home seekers tend to have far less history of using a credit card or looking after their personal finances. Without much in the way of meaningful credit history for lenders to scrutinise, it could mean you miss out on the best deals. So making an effort to build up your score and look after it can reap significant financial rewards.

You can ask for a free copy of your credit report from a credit reporting agency.

It will give you a snapshot of what you and your finances currently look like to prospective lenders – and be a strong indicator of your credit ‘health’.

Visit TransUnion, Experian or Equifax to choose from a variety of credit report services. The so-called statutory credit report, which has no charge, can often be quite basic. So it’s worth examining other free offers which include an email sign-up with a fuller report and indicative credit score.

However, you’ll also likely see some services which also offer to monitor the way you use credit for a monthly fee. It’s up to you to decide if paying extra is useful for your circumstances. 

We are not responsible for, nor do we endorse in any way, such third-party websites or their content. If you decide to access any of the third-party websites, you do so entirely at your own risk.