In previous blogs we have looked at how to plan for purchasing a property and the costs to consider. In this blog we will be focusing on an important aspect of the process which is credit scores. When purchasing a property, you can either buy with cash, which is ideal. The other option is to take out a mortgage which is a secured loan.
What is a Credit Score?
Credit Scores are a measurement system used by lenders to assess the risk levels of lending to an individual. This may determine the interest rate that lenders will use when you borrow from them. A good credit score means the person keeps up with repayments and is trust worthy. Lenders may offer lower interest as the risk of non-payment is low. A bad credit score denotes that the history of repayment has been bad and the person may not be able to keep up with payments. Lenders tend to offer higher interest rates or decline the application.
How to maintain a good credit score
Always ensure that credit repayments are made on time and that you don’t go over the limit because not doing so will adversely affects your history. This includes payments for services like broadband, mobile phones and utility bills. it is important to be aware of your finances, to foresee and mitigate any problems that might occur. Details on how to maintain your finances are in previous blogs, Keys to good Financial Health – Expenditure.
Being registered on the Electoral Roll enables lenders to verify who you are. As a result, this improves your credit scores. An Electoral roll is an official register of people who are able to vote.
Ensure that you are not using up all your available credit. It is especially important to not rely on short term debt i.e. credit cards and short-term loans for day to day expenses. If you do have balances, lenders look at how much of the balance you have used up and this can affect the outcome of an application. It is always best to pay off theses balances as you save on interest in the long run. More information on how to manage your finances can be found on Keys to good Financial Health – Expenditure.
Ensure that any unused lines of credit are closed. This includes unused credit cards, store cards etc. High amounts of overall credit are viewed negatively by lenders and will affect your application.
Holding an account with a bank for long period of time can be viewed favourably especially if you managed the account well. There are many offers that are available if you switch accounts however, I would always advice not switching a long-term account but holding secondary accounts which you can switch as desired.
Too many credit searches of your records because of credit applications in a short period of time, are viewed adversely by lenders as it creates the impression that you are desperate for funds. It implies that you are not managing your finances well and are likely to default on payment in the future. If an application is rejected request for the reason why but do not immediately apply for more credit. When shopping around for mortgages ensure that they are carrying out soft credit checks for your quotes.
Soft credit check is a credit check that is carried out by lenders in order to give you a quote. It is not recorded on your history therefore so no impact on your credit score.
Hard Credit checks are credit checks that are carried out due to an application that has been made. These checks are recorded on your records and future lenders can see them. They affect your credit score if many are carried out in a short period of time. They remain on your records for 12 months.
Withdrawing cash from a credit card is viewed negatively as it implies that you are not good at managing your money. Firstly, cash withdrawals on credit cards have a higher fee thus are more expensive and this is recorded on your credit history.
Hopefully the above will aide you in the planning process. Please feel free to comment or contact me at email@example.com