How to improve your credit score & secure a mortgage

Home buying is stressful enough, but considering how your credit score affects your ability to secure a mortgage adds an entirely new level of anxiety.

But credit scores aren’t just about earning a lot of money or having wads of cash socked away in the bank. In fact, neither influences your score, also known as a credit rating, at all.

Uncertainty about credit scores -- and how they can be improved -- can trigger unease, so let’s discuss how to make your own rating better.

What is a credit score?

Your credit score is an indication of whether lenders believe you are reliable when it comes to borrowing and repaying money.

The score, which takes the form of a three-digit number, is created from data held in your credit report (also known as a credit file). It reflects how you’ve managed your past debts and bills.

Lenders rely on credit reports because they try to predict your future financial behavior based on how you’ve acted previously.

There’s no uniform credit score or rating system in the UK, however. Each lender and credit agency scores your financial record differently.

The information in your credit report may include:

• All your credit agreements, including loans and credit cards
• All your credit applications
• Your history of credit repayment, including any installments you’ve missed
• How much money you owe to lenders
• Public records, including County Court Judgments and the electoral roll

These assessments mostly focus on your recent activity -- stretching back six years -- but all your good, bad, and ugly decisions could potentially form part of your record.

What a credit score doesn’t include

Credit scores aren’t all-encompassing, however.

They’re about how financial institutions think -- based on past patterns of behaviour -- you can manage credit in the future and whether lending to you will pose a risk to them.

Some of the information that’s not factored into a credit score:

• Income
• Savings
• Medical history
• Student loans
• Criminal record
• Council tax arrears
• Parking or driving fines

It’s also useful to know that never having borrowed money before doesn’t actually help your credit score because it makes it challenging for lenders to assess the risk of lending to you.

Why you need a credit score when you’re looking for a mortgage

A good credit score strongly boosts the chances that your mortgage application will be successful.

But a poor credit score may lead the lender to seek more expensive mortgage rates -- or reject your application altogether.

Check out our related blog: Can you port a mortgage with bad credit?

Mortgage lenders just want to be confident you won’t default on your mortgage payments.

In fact, just trying to improve your credit score is one of the most effective things you can do to prepare for a successful mortgage application.

But it’s not just about mortgages. Your credit score influences all kinds of things, including whether you can get certain insurance policies, take out mobile phone contracts, and how much interest you’ll pay on your credit cards.

How you can check your credit score

In the UK, there are three main credit referencing agencies: Equifax, Experian, and TransUnion.

Each agency uses its own scale for determining -- based on your credit report -- what constitutes a ‘good’ or ‘excellent’ credit score, according to Which?

• Equifax: 420 to 466 is good, while 467 to 700 is excellent
• Experian: 881 to 960 is good, while 961 to 999 is excellent
• TransUnion: 604 to 627 is good, while 628 to 710 is excellent

These scores, which you can request from any of these companies, are reflective of what each believes is your creditworthiness.

Your credit score is a useful guide to whether lenders may or may not give you a mortgage, but each lender has its own (largely secretive) system for ultimately determining to whom it will lend money.

The information that the credit referencing agency stores on you merely helps inform that decision.

The agencies are independent of each other, so just because one lender rejects you doesn’t mean that others will as well.

Still, it’s within your rights to insist that the lender inform you from which credit agency they got their information. You can then check with the agency to ensure their information on you is accurate.

Learn more about correcting personal information on your credit file on the website for the Information Commissioner’s Office.

10 things that harm credit scores

Problems with debt and poor credit have been associated with high anxiety and depression, according to the Royal College of Psychiatrists. For others, a poor credit score may offer a lasting reminder of a period of stress and poor mental health.

So, while it’s imperative that you focus on the steps you can take (below) to improve your credit score, it’s also helpful to understand the things that can harm your credit rating in the first place.

Ten things that are detrimental to your credit score include:

• Late payments

More than one-third of your credit score is your payment history, so this is crucial

• Not making payments
• An account sent to collections because of failure to pay
• Having an account charged off

This refers to a statement by a creditor that a debt probably won’t be paid and so is counted as a loss (or ‘written off)

• Defaulting on a loan
• Filing for bankruptcy
• Having your home repossessed
• Getting a judgment against you

This could be a case in which a court has been forced to step in to order you to pay a late bill

• High credit card balances
• Maxed-out credit cards

10 ways to improve your credit score

But there are sensible steps that you can take to manage and improve your credit score.

Ten measures experts suggest you take to improve your credit score include:

• Regularly check your credit report and ensure the information is correct
• Never miss a repayment -- and pay more than the minimum each month
• Check any financial links to other people

The poor credit score of someone you’re connected to financially could harm you, too. An example could be a joint account with a former partner, which may no longer be in the best interest of either person.

• Register to vote

This simple act will boost your score.

• Pay bills by direct debit

Doing so reduces the risk of missing a payment.

• Prove you can manage debt

If you’ve never had a credit card before, get one and use it sparingly, always paying off the balance. This will show you can handle a little debt responsibly.

• Keep your credit utilisation low

Avoid maxing out your credit cards because doing so could prove difficult to pay off -- and harm your chances of getting a mortgage. If feasible, use only 25% of your credit limit.

• Close any unused accounts

Shutting down unused bank accounts will help your rating, as will consolidating multiple sources of debt (like credit cards) into one.

• Be cautious about how often -- and to whom -- you apply for credit

Every credit check leaves a trace on your record. Too many attempts could make you look desperate and lacking control of your finances.

Finally, be patient. Like searching for a new home, improving your credit score takes time.

Note: The Financial Conduct Authority (FCA) has issued guidance on what to do if the coronavirus pandemic has affected your ability to manage your consumer credit repayments.