In today's modern world, if you want to buy a home, short of winning the lottery and buying it cash, chances are you're going to need a mortgage. But just how do you get one if your credit profile isn't quite what it ought to be?
In this guide, we'll take a look at some quick wins you can use to build up your credit profile if you're worried about being turned down for a mortgage or you've had problems in the past.
1. Know where you're starting from:
The first step to repairing or improving your credit profile is to understand your current credit situation. The most effective way to do this is by getting a free hard copy of your credit report from one of the three major credit reference agencies in the UK: Experian, Equifax, and TransUnion (formerly CallCredit).
If you go to their respective websites, you can download a PDF form to get your statutory credit report for free:
(Experian: https://www.experian.co.uk/downloads/consumer/Stat-Application-Form.pdf)
(Equifax: https://www.equifax.co.uk/efx_pdf/CreditReportApplicationForm.pdf)
(TransUnion: https://www.transunion.co.uk/content/dam/transunion/gb/consumer/products/resources/creditfile-app.pdf)
I personally prefer the hard copy reports as they're easier to digest and compare alongside one another when you move onto step number two. Plus, they're free - what's not to like...?!
By the way, all credit profile information about individuals is provided to a lot of other sites from the main three credit reference agencies listed above, so its better to go straight to them for your information rather than via multiple third parties, who will also likely charge you for it, and it may not be as accurate as getting it from the original source.
2. Check for errors:
Once you've got your credit report, check it thoroughly for any errors or inaccuracies. This includes simple things such as the accurate spelling of your name and home address (and previous addresses for the last 6 years), your date of birth, and the accuracy of any credit records held by the credit reference agency.
This is particularly important for any late payments that might be showing on your file. Reference these against your bank records and if the information on your report is inaccurate, you can dispute it with the credit reference agency. Always do this in writing and keep a copy for your own records and for follow-up purposes.
3. Consistency is key:
Make sure your personal data and information shared with each individual credit reference agency is consistent across all three credit reference agencies.
If you remember the Little Britain "computer says no!" TV sketch, you'll realise that in most instances nowadays, decisions about applications for credit are made by a computer which just checks the accuracy and consistency of all the information provided, without any emotion whatsoever. There's unlikely to be a human involved in the process, so its up to you to protect your interests by providing consistent and up-to-date information.
4. Pay your bills on time:
Late payments and missed payments are one of the biggest contributors to a low credit rating. They can affect your credit rating significantly, although sometimes mistakes can be made by the data-entry person at the credit card or loan company, or by the credit reference agency themselves.
This is why its important to check the payment history showing on your statutory report against your own records. If you can prove payments were made on time, provide this evidence to the credit reference agency (with a copy to the credit provider for good measure) and ask for the payment history to be updated.
The credit reference agency will usually require the consent of the credit provider before it makes such amendments, but you can file a notice of correction in the meantime. This will mean a human being is more likely to review your application for credit rather than just relying on a computer.
Then, make sure you pay and credit accounts on time to demonstrate that you're reliable with your credit.
5. Balance-to-limit Ratio:
High credit card balances can indicate you're struggling to manage your finances, which can have a negative impact on your credit rating. If you have multiple cards with balances that are close to the credit limits, and more importantly, you're only making the minimum payments each month, this can mean you're refused further access to credit.
By keeping your balance-to-limit ratio low, it shows you're not 'living on the financial edge' and you have more headroom to play with. That said, if you're not using the full extent of the provided limits occasionally, credit providers may reduce them down to avoid over-exposure.
If possible, pay off your balances in full each month or at the very least, make the minimum payment on time so you're not at risk of late or missed payments being recorded which can damage your credit score.
6. Register to vote:
Registering to vote at your current address can help improve your credit rating. It shows credit providers that you're a permanent resident as well as providing them with a way to verify your identity.
7. Don't move around too much:
Like registering to vote, if you're consistently in one place, this is a good thing as far as credit providers are concerned. If you're moving home every six months, this can make you difficult to keep up with, and will be viewed as a negative.
Even if you're moving a lot with work, its important to have a fixed address for things like your bank and credit card statements to be sent to which shows stability and a permanent place of residence.
8. Limit new credit applications:
Every time you apply for credit, it can leave a mark on your credit report. Too many marks may spook credit providers into thinking that you're in financial trouble and are trying to get more credit to get yourself out of difficulty. This can make them reluctant to approve any new application you make. It's best to limit the number of new credit applications made in a month and within every 90-day period.
The good news is, comparison sites like www.moneysupermarket.com allow you to check your eligibility for credit with certain providers by performing a 'soft' credit search, which does not affect your credit rating.
One of the worst things you can do is apply for credit and get refused, especially if there are blemishes on your credit file which ought to have been cleaned up beforehand, as this is almost always detrimental to your credit profile.
9. Consider a credit-builder credit card:
If you have a low credit rating, you may find it difficult to get approved for a standard credit card or indeed, any other form of credit.
If you're in this situation, consider getting a credit-builder credit card, which is specifically designed for people with bad credit and can help you build a positive credit history over time.
A lot of people get put off by the high interest rate which is applied to these cards. But remember, you'll only be paying that interest rate if the card isn't paid off in full at the end of every month (or 60 day period - check the terms and conditions before you get the card to see what interest-free period is provided for purchases). So, its worth considering using a credit builder card to pay for things such as your travel expenses each month and then pay the card off in full once the statement arrives.
This will help build your credit profile more quickly as you're seen as being responsible with your finances. But if you're in any doubt as to your abilities to pay off these types of card in full at the end of every month, or you're tempted to go on a shopping spree, max out the card and just make the minimum payments, I'll actively discourage you from going ahead as the interest rate will be eye-watering!
10. Avoid payday loan providers:
Payday loan providers or similar organisations can hammer your credit profile, making it incredibly difficult to access credit when you may need it the most. Every time you use them, they're likely to conduct a credit search which will leave a footprint on your credit file.
The worst instances I've seen are where people are applying every month for this type of facility which causes their credit profile to nosedive and makes it harder to get credit again in the future. If you're in this unfortunate situation, there are other forms of help available.
11. Seek professional help:
If your financial situation is becoming complicated or unbearable, it may be time to seek the help and advice of a professional who specialises in this sort of thing. There are financial advisors or debt management companies who may be able to assist, or indeed, the Citizen's Advice Bureau (CAB).
They can help you create a plan to manage your repayments and improve your credit rating, whilst some may be able to speak to creditors on your behalf to help you to work out a plan if things are becoming unmanageable to help you get back on top of your finances.
12. Be patient & Check in Regularly:
Repairing your credit rating takes time and patience. Make sure you stick to the plan and continue to make all your payments on time and in full where you can.
It's important to not just do this exercise once as its a regular thing if you want to maintain the best chance of getting credit when you need it. So after you've made any corrections to your credit file, get another copy of your statutory report to check those changes have been made, and if not, chase them up!
As time goes on, you'll want to double-check the accuracy of information being recorded, so its important to repeat the process outlined above every 90-180 days, depending upon your need for credit and how financially active you are.
I hope this guide helps you manage and repair your credit rating as quickly as possible. Good luck!