Introduction
When evaluating your mortgage application are a number of factors a lender will consider. One of the most important factors is your credit score. There are a number of ways to improve your credit score prior to your application to a commercial mortgage broker, it is important to first understand what a credit score is, and how it will impact your ability to borrow funds.
Due to the fact that each credit reference agency (CRA) uses its own criteria, a UK credit score can be defined in a number of ways. One of the most universal definitions states that a credit score is a numerical definition of an individual's creditworthiness.
Credit scores are derived from an individual’s financial history and current borrowing behavior.
CRA Inputs
Payment History: Payment history is used by the CRAs as an indication of the individual's ability to pay debts in full and on time. Missed or delayed payments are likely to have a negative impact on an individual's score.
Use of Credit: CRAs will also analyze an individual’s use of credit. A high level of debt can have a negative impact on an individual's credit score, especially if it is short term, high cost credit. The CRA will also analyze how long the individual has had credit. It is beneficial to have a long history of credit as this enables potential lenders to better understand an individual’s ability to repay their debt.
Types of Credit: The type of debt an individual has is an important determinant of their credit score. Generally is it beneficial to have a mix of sustainable debt such as mortgages, credit cards etc.
Additional Information: CRAs will also take into account any additional information. Recent CCJs or IVAs are likely to have a significant detrimental effect on an individual's credit score. Similarly, individuals who have taken out significant credit lines in a short period of time are likely to see a reduced credit score.
As you can see there are a number of different factors affecting credit scores and how they are calculated. Generally your credit score will be represented as a number, the higher the number, the more favorable you will be to lenders. A high credit score is important as it will dictate your ability to access debt, but also how easily you can access it.
Higher credit scores can contribute to:
Easier Application Process: lenders are more comfortable lending to those with higher credit worthiness, therefore the application process is likely to be quicker and easier for those with a high credit score.
Lower Cost of Credit: Given the fact that lenders prefer borrowers with a higher credit score, they are likely to offer better products and interest rates.
Higher Loan Amounts: Borrowers with a low credit score are often restricted to lower LTVs. The reason for this is that lenders do not want to over-expose themselves to risk.
With the above in mind, it is important to ensure that you have a high credit score when applying for a loan in order to achieve more favorable loan terms.
There are a number of different ways in which you can increase your credit score prior to a loan application:
On Time Payments: Individuals should ensure that they make any credit related payments on time. In doing this, they will ensure that they are showing any future lenders that they can support their levels of debt and that they are a reliable borrower. While one on-time payment will not have a massive effect on their credit score, regular on-time payments over a number of years will effectively demonstrate their reliability as a borrower.
Reduced Debt Levels: As previously mentioned, being over-exposed to debt is likely to reduce an individual’s credit score. By reducing debt levels to below 30% of the debt available to them, individuals can increase their credit score. The reason for this is that it illustrates that the individual is not overly-reliant on debt in order to fund their day-to-day expenses.
Keep your Old Accounts Open: Old accounts help to illustrate your credit history, especially when you are applying for new debt. With this in mind, it is important to keep your old accounts open for as long as possible, especially if you have not missed a payment on these accounts.
Avoid High Cost Debt: Another factor to consider is the type of debt for which you have applied. Short-term, high-cost debt such as payday loans are likely to signal to the lender that you are unable to afford your day-to-day expenses and may restrict your access to new debt.
Conclusion
There are a number of ways in which an individual can increase their credit score, from on time payments to reduced debt levels. It is important to consider the impact of a missed payment on your credit score prior to entering into any new debt facilities as your credit score cannot be changed overnight, and is instead an indication of your ability to repay your debts over an extended period of time.
In order to better understand your credit score and how it might affect your ability to access new debt you should consult with your independent mortgage broker.