What is a bad or poor credit rating?
You’ve spent years saving up your deposit for a new home. You’ve waited for the right moment. Now it’s here. The only thing left is to secure your mortgage. We can help show you how.
If you’re thinking of buying a home, you’ll need a credit rating that’s good enough to secure a mortgage. Your credit rating (also known as a credit score) is a snapshot of how you’ve managed money in the past – including past borrowing, repayments, how much of your available credit you routinely use, how many payments you’ve missed and several other factors to create a score. The higher the score, the better your chance of being offered a better deal on your mortgage.
There are three major credit reference agencies (CRAs) – each with a slightly different scoring system. So it’s a good idea to check your credit rating with all three to find out how you rate. That way, you’ll know whether you’re likely to get a mortgage.
Taking steps to protect and maintain your credit score has always been important. That’s especially true if you’re planning on buying a home.
So it’s important to stay on top of your finances during this challenging time. That includes paying your bills on time, and contacting lenders and service providers if you do run into trouble. Here are a few things you can do:
Most of the top credit rating agencies have five categories for credit scores: excellent, good, fair, poor and very poor. The exact score you need will vary from lender to lender, since there isn’t a minimum credit score needed for buying a house. But the higher your credit score, the better your chances of getting the mortgage you need.
Each credit reference agency uses a slightly different scoring system, so your score will be different with each. Therefore, it’s a good idea to check with all the agencies before applying for a mortgage.
The three main credit reference agencies in the UK are Experian, Equifax and TransUnion (formerly Callcredit). These are the ones most lenders rely on when considering someone for a mortgage. You can check your credit rating with all three agencies for yourself. It’s your right – and it’s free.
Since different credit agencies use different rating systems, a good score will vary from one agency to the next. For Experian, a score of 881-960 is considered good, and a score of 961-999 is considered excellent. For Equifax, a score of 420-465 is considered good, and a score of 466-700 is considered excellent. For TransUnion (formerly known as Callcredit), a credit score of 604-627 is considered good, and a score of 628-710 is considered excellent.
To find out what an average score is, you can check out What is a good or average credit score.
Along with your credit score, lenders use a host of other factors to determine whether to give you a mortgage. They look at your income, expenditure debt and savings, as well as your credit score to assess the risk of lending to you. If you have a good track record with your bank and have been a reliable customer for a number of years, that will help ease their concerns.
Equally, having an initial deposit of over 10% will work in your favour, or assistance from a Help to Buy scheme.
Your yearly income and ability to make monthly payments will also come into play.
..the longer you’ve been in work and paid off your monthly bills, the more likely it’ll be that you’ll be able to take your first exciting step onto the property ladder.
One way to improve your credit score is to use a credit-building credit card. Spend a small amount on it and then pay the card off in full every month. This will help raise your credit score, and also shows lenders you only use a small percentage of the available credit on offer – a key factor that credit agencies look at.
Check out our tips on how you can raise your credit rating even further.
Another tip is to speak to lenders with special expertise in buying houses where there are credit issues. There are lots of mortgage lenders out there who will help with hard-to-place mortgages, including help for self-employed workers struggling to meet the requirements.
Your mortgage application is less likely to be successful if your credit rating has room for improvement, or if you don’t have a history of borrowing. As well as improving your credit score to up your chances of qualifying, you can also look for something called a bad credit mortgage.
Because lenders view this type of mortgage as higher risk, the terms of the mortgage (especially the interest rate) will probably be less favourable than if you have a good credit rating. You can talk to an independent ‘whole market’ broker for an impartial overview of your options.
The Help to Buy ISA is no longer open to new customers as of 30 November 2019. However, if you already have one, you can continue saving into your account until 30 November 2029 and claim your bonus at any point up to 1 December 2030.
The Help to Buy ISA is a tax-free way for first time buyers to save up for a deposit to buy their first home. As long as you add at least £1,600, the government will top up your savings by 25%, up to a maximum £3,000 bonus. Conditions apply, including a maximum amount you can deposit each month and an upper limit on the property price.
Read more about what makes a bad credit rating. Barclays also has advice on choosing a mortgage if you’re a first time buyer.