Most of us do not think about our credit scores too often. We happily meander through life without giving it a second thought until we make a large purchase. Something that means we need to apply for finance of some kind, and it slowly dawns on us that we really should know our credit score. Whether it's for a credit card, car finance, or a mortgage, it all rests on that little credit score that you have, until this point, completely ignored.
As you push the button on the application and wait patiently to find out if you can have the loan, it will become very apparent how important that credit score is. Because it's the main thing you're judged on. Your credit report will show how well you can manage your finances and how much other debt you currently have to pay back.
The lenders will decide how much money you can borrow using affordability criteria, and they'll use your credit profile to give them an idea of how you manage your personal finances. Of course, they can't meet you in person and have a conversation, so your financial footprint is the next best thing and shows how good you are with your money at a glance.
As I am sure you already know, you must pay your loans and credit cards on time. Your credit profile will show the lenders every time you have gone into overdraft or been a few days late with a payment. And each time this happens, it can impact your overall score.
But you might not be aware that the lenders are also looking for how leveraged you are, meaning how much debt you carry. Even though you might make your payments on time every month, if you have too much debt, you may still be declined for a mortgage. The lender may decide that with the new loan on top of your existing liabilities, you will be financially overstretched and may therefore reject your application.
In an ideal world, a mortgage lender would prefer it if you had no other debts except your mortgage. This might not be 100% practical, but if this is the gold standard, working your way towards this by reducing your debt levels as much as possible will certainly help. It will also increase your actual credit score as you do it too.
Mortgage lenders do not want to run the risk that you may have to decide which debt to pay. They are trying to avoid a scenario where you might be a little tight with your income one month and have to choose between paying your credit card, car loan or mortgage because you simply can't afford to pay all three.
Try checking your credit report today - it is available online for free, and you might even be surprised! You can then look at ways to improve it (there is always room for improvement) so that the next time you want to apply for a loan or mortgage, you won't have that dreaded knot in your stomach because you have no idea if you'll pass or not.
You don't want to sit in the car garage about to sign for a fantastic new car, only to be told you can't have it because you've failed the credit score. Or to have spent weeks searching for a new home only to have the excitement of your accepted offer torn away from you when you apply for the mortgage - all your dreams dashed in one fell swoop.
It can take months or even years to rebuild and repair a credit score, so there is no time like the present. Changes and improvements are easy to make and can really help.
Here are a few tips:
- If you have multiple loan payments, make the minimum payment on everything as a direct debit and then overpay the loan with the highest interest rate so that one gets paid off first. Then move it to the next one, with the highest amount you can afford until you have eventually cleared off all your debts. This is a long-term suggestion, but each time you overpay one of your cards or loans, your credit score will improve too.
- Don't try to pay off debts and continue over-spending. This will not give you any progress whatsoever.
- If your score is very low, consider taking out a credit card specifically for those with poor credit. The interest rate on these cards is eye-wateringly high, so you must be very disciplined. Set the card up so that it pays off in full each month (so you won't ever be charged that elevated interest rate), and use it to pay for only things you can afford to pay off in full. A simple rule would be to use it for fuel only. Your credit score will improve each time you spend on the card and pay it off in full. After a few months of this, you can clearly show that you can pay cards and loans responsibly.
A mortgage lender will be critical of your financial situation because they are considering you for a loan of 25 or maybe even 30 years. It is a huge commitment, and they must ensure that the money they loan you can be paid back. Give your credit score a little upgrade to show that you are an excellent candidate for a mortgage, and remove the possibility of disappointment when you apply for the mortgage to pay for the house of your dreams.
