Your credit rating is one of the key things most lenders will use to assess whether to lend to you and if so, how much.
While proving your income is important, the main thing all lenders are interested in is your ability to repay. Even with a low income, if they think you will be a reliable borrower, they’ll be more willing to lend. If they think you are likely to miss payments or default altogether, they won’t. That’s where your credit record comes into play.
Lenders will use it to take a closer look at your financial history to see if there is anything for them to be worried about. However, even if you have a less than perfect credit rating, there are things you can do to improve it to stand you in better stead for when it comes to applying for a mortgage. Read this short guide to find out more.
What is a credit rating?
Your credit rating is what credit providers, such as mortgage lenders and loan and credit card providers, use to make decisions about whether – and how much – they will lend to you.
It contains a record of your financial history and behaviour, which lenders will use to try and predict how you may behave in the future, based on your record with credit in the past. If you have taken out credit before and have never had any problems meeting the repayments, chances are your credit rating will be positive. If, however, you have a past history of missing payments and running up debts, or have things on your record such as bankruptcy, an IVA or a CCJ, these can all impact your credit record and make it difficult to access credit.
If you have ever been the victim of fraudulent activity related to your finances, this can also appear on and affect your credit record, as can mistakes made by your lender. So, it’s always a good idea to check your credit record regularly and if you spot anything unusual or suspicious, query it right away.
How to improve your credit rating
Even with a low credit rating, there are things you can do to improve it which will ultimately put you in a better position when it comes to applying for a mortgage or loan. Knowing what to do is half of the battle. Here are a few things you can do to improve your credit rating:
Don’t take on extra credit for the sake of it
Every time you apply for credit, regardless of whether you take it or not, it will show up on your credit record as what’s known as a ‘hard inquiry’. The more hard inquiries you have on your record, the more damage you will do to your credit record. So, if you are thinking of taking out extra credit, consider how you might be able to do it with your current provision, such as putting something on your existing credit card, rather than taking out a new store card, as lenders may interpret it that the more credit you have access to, the more potential debt you can run up and, ultimately, not repay.
Don’t max out your credit card
Just because you’ve got a big credit card limit, doesn’t mean you have to use it. Having a high debt-to-credit ratio could signal to lenders that you are using credit too much and could be having financial problems. So, maintaining a low credit card balance is the way to go.
Pay down your debts
Related to the above point, paying off your debts as quickly as possible will help to reduce your debt-to-credit ratio and have a positive impact on your credit rating. If you are buying a house, this can have other benefits, as if you are not carrying much debt, you will have fewer financial commitments and other costs, which may mean you can afford a bigger mortgage.
Check your credit report
You should always check your credit file with a credit reference agency before you apply for credit. It will help you to spot and rectify any mistakes or fraudulent activity. If you spot any mistakes, get the credit reference agency to rectify them and if you spot any suspicious activity, let them know immediately.
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