When applying for a mortgage, one of the first things lenders
will look at is the applicant's credit score. A person's credit score
works as an indicator to the lender as to whether or not they are worthy
of taking on such a big responsibility.
How is it calculated?
A credit score is numbered between 0 and 1000. Having a higher score indicates one is more likely to keep up repayments of a debt. Therefore, by having a higher score, lenders are more likely to offer the borrower a loan, and possibly at a lower rate.
A lender will calculate each applicant's credit score based upon these areas; a history of on time payment of bills, debts and credit cards; the length of time at their current address; if they are a homeowner; any financial dependants; previous loan applications; if they have been bankrupt; and if they are on the electoral role.
While this is a loose indication of the criteria used, each lender will have their own formula to calculate a credit score. Similarly, they may give different weight to certain information when deciding how reliable a prospective borrower will be. As such, people's credit scores change and fluctuate.
How to improve one's score
As one's score is likely to change, depending upon the lender, it is best to keep the highest possible score. This can be done through various means;
By being a homeowner or living in the same property for more than 12 months. It gives the impression of financial stability as they have stayed in one particular area.
By not being financially connected to people with bad credit. In the eyes of a lender, it poses an additional risk if the applicant is connected to someone with a poor debt history.
Having debts and credit registered with the correct name and address for a long time. This is because it suggests security and stability in their daily life. Similarly, having bank accounts and credit and debit cards for a long time has the same effect.
Would-be borrowers should have a practical approach when deciding which loan and rate they require. It suggests to lenders they have an understanding of what is realistically in their price range. Similarly, not applying for multiple loans in a short space of times is advisable, as this gives an impression of desperation.
By proving to lenders one can repay debts. This may be done through taking out a high interest credit card.
By spending small amounts and repaying the debt quickly, it shows lenders they can keep on top of their financial commitments. This should, however, be done for at least 6 months before applying for any loans. Alternatively, keeping up with phone and utility bill payments, as well as paying off any overdrafts, help improve one's credit score.
Potential borrowers should also avoid missing any payments on bills, bank cards or debt, as this can put a black mark next to their credit score. Similarly, County Court Judgements, defaults and filing for bankruptcy also give reason for lenders to resist offering applicants loans.
Impact of a poor score on a loan
By failing to improve ones' score, a prospective borrower risks a number of issues when applying for a loan;
One may be offered higher interest rates. Lenders fear borrowers not keeping up with payments, thereby losing them money. As a result, they may charge higher rates to cover their possible losses.
The borrower may be offered a smaller loan amount. By doing so, the lender will not lose as much money if the applicant cannot keep up with payments. From a borrower's perspective, it gives them an incentive to improve their score so they can get a larger loan, and purchase a better property.
Some applicants may have a loan application rejected completely. This will put a black mark next to their name, and cause issues for them in the future when applying to a loan.
The importance of a good credit score cannot be understated. With the economic climate far from certain, and interest rates at an all-time low, now is a good time to improve or start building up a solid credit score.
How is it calculated?
A credit score is numbered between 0 and 1000. Having a higher score indicates one is more likely to keep up repayments of a debt. Therefore, by having a higher score, lenders are more likely to offer the borrower a loan, and possibly at a lower rate.
A lender will calculate each applicant's credit score based upon these areas; a history of on time payment of bills, debts and credit cards; the length of time at their current address; if they are a homeowner; any financial dependants; previous loan applications; if they have been bankrupt; and if they are on the electoral role.
While this is a loose indication of the criteria used, each lender will have their own formula to calculate a credit score. Similarly, they may give different weight to certain information when deciding how reliable a prospective borrower will be. As such, people's credit scores change and fluctuate.
How to improve one's score
As one's score is likely to change, depending upon the lender, it is best to keep the highest possible score. This can be done through various means;
By being a homeowner or living in the same property for more than 12 months. It gives the impression of financial stability as they have stayed in one particular area.
By not being financially connected to people with bad credit. In the eyes of a lender, it poses an additional risk if the applicant is connected to someone with a poor debt history.
Having debts and credit registered with the correct name and address for a long time. This is because it suggests security and stability in their daily life. Similarly, having bank accounts and credit and debit cards for a long time has the same effect.
Would-be borrowers should have a practical approach when deciding which loan and rate they require. It suggests to lenders they have an understanding of what is realistically in their price range. Similarly, not applying for multiple loans in a short space of times is advisable, as this gives an impression of desperation.
By proving to lenders one can repay debts. This may be done through taking out a high interest credit card.
By spending small amounts and repaying the debt quickly, it shows lenders they can keep on top of their financial commitments. This should, however, be done for at least 6 months before applying for any loans. Alternatively, keeping up with phone and utility bill payments, as well as paying off any overdrafts, help improve one's credit score.
Potential borrowers should also avoid missing any payments on bills, bank cards or debt, as this can put a black mark next to their credit score. Similarly, County Court Judgements, defaults and filing for bankruptcy also give reason for lenders to resist offering applicants loans.
Impact of a poor score on a loan
By failing to improve ones' score, a prospective borrower risks a number of issues when applying for a loan;
One may be offered higher interest rates. Lenders fear borrowers not keeping up with payments, thereby losing them money. As a result, they may charge higher rates to cover their possible losses.
The borrower may be offered a smaller loan amount. By doing so, the lender will not lose as much money if the applicant cannot keep up with payments. From a borrower's perspective, it gives them an incentive to improve their score so they can get a larger loan, and purchase a better property.
Some applicants may have a loan application rejected completely. This will put a black mark next to their name, and cause issues for them in the future when applying to a loan.
The importance of a good credit score cannot be understated. With the economic climate far from certain, and interest rates at an all-time low, now is a good time to improve or start building up a solid credit score.
If you would like to find out more about how Capital Fortune can help you find the best mortgage deal, check out our website.
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