Why your credit score could cost you your mortgage (and how to boost it)

Britain is gradually getting over its recent mortgage crisis, but with rates remaining high first-time buyers and homeowners alike are feeling more pain than they have for a generation. 

It was predicted the Bank Rate could go up to 5.7pc, but the Bank of England decided to hold it at 5.25pc at its most recent meeting, suggesting it may have already peaked.

One of the crucial things that determine whether or not you qualify for a mortgage deal is your credit rating.

Credit scores are used by lenders to help assess a borrower’s creditworthiness. To applies to mortgages, but other types of borrowing, too.

If you have a poor credit score when you come to apply, you may fail to get the deal you hoped for.

Salman Haqqi, personal finance expert from Money.co.uk, said: “A good credit score is needed in order to be approved for a mortgage. Having a high score is crucial in order to show a lender that you can be trusted to pay back a large amount of money in a certain time-frame. It will also mean you are more likely to be offered better interest rates.”

The good news is, there’s some simple steps you can take to boost your credit rating, helping you unlock a wider range of mortgage offers – and at more competitive interest rates. Being eligible for the best deals will save you money in the long run. Here we take a closer look.

What is a credit score?

A credit score is not a fixed number. It is a constantly-changing record that reflects how you use credit.

Your credit record is like a financial CV which shows how “credit-worthy” you are – and how likely you are to make repayments on time.

What is a credit reference agency?

A credit reference agency is an independent organisation that securely holds data about you.

This includes things such as your credit applications, accounts, and financial behaviour.

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

Each has their own scoring system.

TransUnion, for example, gives a score up to 850. Anything between 721-780 is classed as “good”, and between 781-850 is classed as “excellent”. A very poor score is in the range of 300-600, with 601-660 considered to be poor.

While the exact scoring system differs from one agency to the next, with all three, the higher your score, the better your rating.

That said, it’s important not to get too fixated on exact figures. A better approach is to think of these ranges as guides.

How is a credit score used by a lender?

If you have a tip-top score, a lender will view you as someone likely to keep on top of repayments – and therefore a more attractive proposition to lend to. Usually, the very best offers will be reserved for such borrowers.

By contrast, if you have a low score – perhaps due to late payments or unpaid bills – you may find it harder to get the mortgage deal you want, as lenders will view you as financially unreliable.

Mark Harris from broker SPF Private Clients, said: “Those with a low credit score shouldn’t expect the best or cheapest rates on the high street. There may also be restrictions around maximum loan-to-values and loan-to-incomes, so it could restrict how much you can borrow.”

Looking at the mortgage rates available on the market today, Mr Harris said Metro Bank was offering a two-year fixed mortgage at 6.7pc with a £999 fee for someone with a good credit score. However, someone with a bad score was being quoted 7.39pc and a £1,999 fee for the same mortgage. 

While you might assume that having no debt would put you in the best position in the eyes of a lender, this is actually not the case.

Mr Harris said: “Many people think they would appear to be in a stronger financial position if they don’t have a credit card or other debt. But if they can’t demonstrate that they can handle debt – and pay back what they owe on time – a lender won’t know whether they are reliable on this front or not.”

So just how do you go about making sure your credit report is in the best possible shape it can be?

How to improve your score

Here are a set of simple actions you can take to bolster your rating. Some will have a quick positive impact, while others will help build your rating over time.

1. Get any mistakes corrected

Checking your credit report regularly is a good habit to get into. It is free to do, and will allow you to access the same information used by banks when deciding who to lend to. You can check the details held there are accurate and up-to-date. If you spot any errors, such as a wrong address, or a missed payment that you had paid off, you need to get these corrected.

2. Get registered on the electoral roll

Both lenders and credit reference agencies use the electoral roll to check your address and identity. Being registered to vote is also viewed as a sign of stability.

Nicholas Mendes from mortgage broker Charcol said: “Most lenders verify your identity electronically these days. Being on the electoral roll counts a fair bit towards identifying who you are and your credit score. Not being on it can be viewed as a negative point by lenders – even if the reason is that you don’t vote.”

3. Make all payments on time

It’s vital to be disciplined about making all credit card payments when they are due. Missed payments can have a big impact on your credit rating, and could leave a mark on your file for up to six years. Make things easier by setting up direct debits for all bill payments.

4. Demonstrate you can borrow responsibly

As mentioned above, lenders will be keen to see you can manage debt. So if you don’t have a credit card, you may want to consider taking one out and paying the balance off in full every month.

Mr Mendes said: “Lenders use a process called credit scoring to help assess your ability to responsibly handle credit. Regularly using and repaying a credit card is a great way to demonstrate this – and to boost your credit score.”

5. Avoid maxing out your credit limit

Take care not to max out your credit balance. Ideally, you should be using below 30pc of the amount available. Don’t exceed your agreed overdraft.

6. Ditch credit cards you no longer use

Close down cards and accounts you are no longer using, or which have been unused for a long time.

7. Cut ties with past partners

If your credit report links you to an ex-partner, perhaps via a joint bank account or being jointly named on household bills, that person’s credit rating could harm your score. If you are no longer connected, request for a “notice of disassociation” to be placed on your record.

8. Avoid a scattergun approach to applying for credit

Resist the temptation to make a lot of applications in a short space of a time, as you may be viewed as desperate for credit, and a lender may turn you down. Always use an “eligibility checker” tool, meaning you can carry out a “soft” search.

Use a free eligibility checker tool, such as those from MoneySavingExpert, MoneySuperMarket, uSwitch, Go.Compare or Money.co.uk. This will give you an indication of your chance of being accepted, without leaving a mark on your credit file – boosting your chances of making a successful application.

This article was first published on July 11 2023 and has since been updated.