“You need a good credit score if you want to apply for a mortgage!”

It’s something you hear often, from adverts on the TV, experts on the radio and posters on the way to work, but just what is a credit score and how does it affect your day to day life? Is it as important as they say, or is it a simply an arbitrary metric like height, or the number of pushups you can do? Fortunately, the experts at IMC aren’t great at pushups, so instead we’ve been spending our time drawing up this useful guide of just what a credit score means for you and your prospects of getting a mortgage.

Defining a credit score

Fundamentally a credit score (or credit rating – it’s essentially the same) is a way for lenders to assess how good potential borrowers are at paying back their debts. This typically takes the form of a number between 300 and 850, with higher a number indicative of a better track history. A number over 720 is generally considered excellent, meaning that lenders are often more willing to lend money to these individuals – seen as low risk. On the other side, a score below 620 is considered by most lenders to be bad, decreasing the amount that can be borrowed – or simply resulting in outright rejection.   

It goes without saying that a higher credit score is more desirable, helping to unlock better deals, ease the process of borrowing and earn lower interest rates on the amounts you do borrow.

How is a score calculated

When bookmakers determine the odds for a horse they’ll typically look back at its previous history; how it’s performed in recent races, if it’s had any unfortunate accidents and what condition it’s in at the moment. This is similar to the process that lenders use, looking at your previous debt history to work out the odds of you repaying in full, and on time. The lower the odds, the higher the score.

Credit card debt, time spent in overdraft and the timeliness of owed payments are all factors that feed into working out a credit score, a full breakdown, based on full credit reports is outlined below:

Payment history – 35%

Quite simply, your track record to date. It is the most reliable indicator to lenders and therefore is the largest single factor in the calculation.

The amount owed – 30%

Also simple, yet important. This is the debt you currently owe, making paying off existing debts a key component to improving your score.

Length of credit history – 15%

The longer the period of good credit behaviour, the better the score. For example, someone who hasn’t missed a payment in 50 years will have a better credit score that someone who has only been borrowing for 2 years, even if they have a perfect track record. This means that a truly excellent score has to be built up over time.

Credit mix – 10%

This factors in the types of credit you’ve taken out previously – the wider the range the better, as it shows a person is responsible with a number of different kinds of debts, such as credit cards,  car loans and mortgages.

New Credit – 10%

When a debt is incurred a credit score will take a small hit. This is why applications for credit cards and/or loans should be spread out over time, preferably over months to allow your score to recover in between.   

What a credit score means for a mortgage

When it comes to mortgages the credit requirements of lenders will vary significantly. There’s no singular cutoff limit adopted by mortgage providers as a whole although some will be more flexible than others. It’s also important to note that a low score doesn’t automatically get you thrown out of the mortgage club, with lenders considering a range of other factors when making their final decision. Demonstrating that you have a stable income capable of servicing debts and paying a mortgage will work in your favour, as will putting up a larger deposit – preferably 10% of the property value.

When it comes to applying for mortgages don’t go for the scattergun approach. Every time you make an application a lender will perform a credit-application search, an in-depth look at your financial history that leaves a footprint of sorts. The more applications you make the more footprints new prospective lenders will find when they perform their own search, indicating that perhaps, you’re not as careful with applications as they’d prefer. With this in mind, it’s worthwhile taking time to build up a good credit score before enquiring.

Bear in mind that simply asking a lender what rate you’re likely to get won’t leave a footprint. However asking them whether they’d lend to you might involve a credit search, so be careful.

How to improve a credit score

As with anything worthwhile, building up a good credit score takes time. However, the steps involved are fairly simple, just ensure you can afford to pay back potential loans in accordance with a pre-existing payment plan. Likewise, paying off existing debt will significantly improve your score.

Small details can also make a big difference, for example eliminating mistakes (such as incorrect addresses) on your file can make a huge difference, as can registering your address on the electoral roll, allowing agencies to verify where you live. Finally, ensure that your account isn’t linked to another person with debts that could impact you, this could be a spouse or perhaps a family member.

If you want to find out more about credit scores and what they mean for your mortgage get in touch with IMC, our friendly team of mortgage experts would be delighted to sit and discuss all the options available to you.