Do you have a bad credit rating? Have you ever missed a payment on a monthly mobile phone contract? Failed to set up new direct debits after switching bank accounts? Gone overdrawn without arranging an overdraft first? Thousands of people have without realising the devastating effect this can have on their goals in life, such as buying a house or renting a property in a new city or town.
Banks tighten up lending
Missing even one payment deadline goes on your credit record, which the credit rating agencies use to help assign a credit ‘score’ to you. Generally, the cleaner your record, the higher your score.
However, since banks started tightening up their lending criteria after the start of financial crisis in 2007, the score you need to be deemed worth doing business with (not just for borrowing but in all sorts of areas, from car hire to flat rental) has shot up. This can be extremely problematic, especially for potential home buyers and home movers.
Problems for home buyers and renters
If you want to buy a property but are deemed too ‘high risk’ due to your credit score, you probably won’t be able to get a mortgage.
Likewise, if you need to rent a home, the landlord or rental agency might decide not to rent to you if they run a credit check and don’t like the result.
And the problem has been getting worse year on year. Mortgage approvals were down 17% in the year to July, and are a huge 54% lower than in July 2007, at the start of the financial crisis.
It’s also affected the size of deposit banks require, with the minimum needed to secure a home loan doubling to 10% of the purchase price.
What you can do about it
Advice for potential home buyers:
• Even if you know your credit record isn’t great, you might still get a mortgage from those banks and building societies with which you already have a relationship of some sort, so approach these first.
• Get as big a deposit for your home as possible. Between buyers with the same credit score profile, the applications from those with the higher deposit will be viewed more favourably.
• Specialist lenders are an option. Some lenders are set up to offer mortgages to those with low credit scores. Interest rates and other charges will be higher than available from ‘normal’ lenders however.
Advice for potential renters:
• If you have a low credit score, and are initially rejected as a potential tenant, you could offer to pay for the whole rental term up front, or increase the security deposit.
• A guarantor who is a home owner (such as a parent, uncle or grandparent) will often be acceptable.
• Once you’re a tenant, make sure you pay up on time each month. A good tenancy record can help build up and improve your credit score.
Improving your credit score
Improving your credit score is not always easy, and can take time. However, here are some of the main ways to achieve this:
• Make sure you’re on the electoral role – If you’re not, it’s highly unlikely you’ll get any credit at all, no matter how good your score is in other areas.
• Be a good borrower – make all credit card and bill payments on time (if you can’t, always contact your lender and try to come to an agreement, or simply let them know you’re going to miss a payment). Always notify companies of a change in address and ensure you set up new direct debits if you change bank accounts.
• Avoid too many credit searches – Try to avoid getting new insurance, credit cards, bank accounts etc. in close time proximity. Too many credit searches raise suspicions, especially if you were ‘rejected’ as this too goes on your record.
• Stay put for a while – On the whole, the longer you have the same address, and same employer, the better it is for your score.
• Get access to your credit file – You can approach the main 3 agencies (Experian, Equifax or CallCredit) and get access for a small fee. Or Checkmyfile at http://www.checkmyfile.com/ will give you a good summary from all three.
• Correct errors – If there’s something you think is wrong on your file, approach the agency. If you can show why it’s wrong, they’ll change your record. If they won’t, but you think you’re in the right, you can take it to the financial ombudsman.
• Cancel unused credit cards and ‘downsize’ – If you have a good number of credit cards, cancel the ones you hardly use and transfer any outstanding debt to a smaller number of cards (especially the ones you have the best record of payment with).
Image credit: Images of Money
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Published 13 September 2012