I went into debt to prove I could afford a mortgage
IF YOU have always vowed never to have a credit card but want to buy your first home, you may have to break your “no-plastic” pledge.
First-time buyers wanting to get on the property ladder should start improving their credit ratings up to a year before applying for a mortgage, so they can show lenders they have a good history of paying off debt. This means, for instance, taking out credit cards, clearing any parking fines and correcting inaccuracies on their credit files.
Buyers must devote time to ensuring their credit files are spick and span to be sure of landing good mortgage rates.
James Jones, head of consumer affairs at the credit reference agency Experian, said: “Ideally, first-time buyers should check their credit reports about a year before applying for mortgages, giving them plenty of time to make improvements, if necessary.”
Sarah Pennells from the consumer website savvywoman.co.uk added: “It’s definitely worth getting hold of your credit report before applying for a mortgage. If you’ve missed any payments, make sure that happened at least six months ago. If necessary, delay your mortgage application.”
A poor credit score may mean buyers are refused a mortgage or offered less than the full amount needed, and therefore forced to use a specialist lender that charges a higher interest rate.
David Hollingworth from the broker London & Country Mortgages said that the double whammy of a small deposit and a poor credit score could leave first-time buyers struggling to get onto the ladder.
My personal experience
My husband and I are in the process of buying our first home. When we checked our credit scores, we discovered that correcting and improving them was complicated and time consuming.
First, my credit report could not be found. My husband Lawrence, by contrast, had no such trouble and gloated that he had received 5/5 from Noddle, a free service offered by Callcredit. I realised that my “non-existence” was due to my addresses not matching up. I still had bank accounts registered to my parents’ address in Buckinghamshire but I was registered to vote in London, where we live.
I updated all my addresses and logged on to Noddle again to discover that I now existed, and had a credit score of 3/5.
Meanwhile, my husband had realised that his credit file included personal loans and credit cards taken out by his twin brother and their late grandfather, who he lived with before he went to university. He promptly emailed Noddle to remove the erroneous products.
I was now busy applying for my very first credit card. I had grown up believing it is good to live within your means, and not rely on overdrafts, credit cards and so on, yet here I was getting a credit card just to show lenders that I was financially responsible. I bought a few things with my new Nationwide card just to make use of it, and my score increased to 4/5. However, when Noddle removed the incorrect information on my husband’s report his score fell from his pristine 5/5 to 4/5. I asked Noddle what had happened to Lawrence’s credit rating. Jacqueline Dewey, its head of consumer markets, said: “It looks like the lenders provided incorrect information. I suspect that is because the lender has the same date of birth for the twin brother, the same address, and potentially a common initial.”
She added that the decline in Lawrence’s credit score could be a result of him now having a “thin file” — in other words, a lack of credit history — once the incorrect information had been removed.
This tale has a happy ending though. Last week NatWest approved our five-year fixed mortgage. It has a competitive 3.15% interest rate.
What is a credit report?
It contains your name, address and financial details, such as your payment history for credit cards, loans, overdrafts, mobile phone contracts and, sometimes, utility bills.
The report will also highlight any county court judgments and bankruptcies, the number of times lenders have conducted credit checks on you — these expire after one year — and whether you share a financial responsibility, such as a joint bank account, with your partner.
It does not contain details of any student loans, apart from those taken out before 1998, savings accounts and criminal records.
Six ways to ensure lenders think you are a good bet
1. Correct mistakes
Check your credit report with a company such as Equifax, Experian or Callcredit. It costs £2 each time to view your report. You can also sign up for a free trial, but make sure you cancel it to avoid paying an ongoing monthly fee. Noddle lets you access your credit report free of charge for life.
If you spot any inaccuracies, you can either contact the lender directly, or notify the credit reference agency. The lender or agency has 28 days to correct the information, remove it from the report, or do nothing. If you are unhappy with the response, you can complain to the Financial Ombudsman Service.
You can also add a notice of correction to your credit file. The 200-word statement can be attached to explain things such as missed payments as a result of life changes, such as losing your job or divorce. The lender must read this when considering a mortgage application.
2. Get a credit card
If you have always prided yourself on living sensibly by just using debit cards, now is the time to put your principles to one side and apply for a credit card. Sarah Pennells from savvywoman.co.uk said: “If you have savings and have never applied for a credit card, you may be the lowest risk, but a lender probably wouldn’t see you that way. They want evidence you can borrow money and pay it back responsibly.”
So, apply for a credit card and use it – but pay it off in full each month, and avoid using the limit.
Dan Plant at moneysupermarket. com said: “Maxing out your card can be taken as a sign of financial stress. Not skating too close to the edge also eliminates the chance of you being charged for exceeding your limit. Try to remain within 30% of your credit limit.”
If you have a poor credit score and may be turned down for a conventional credit card, consider taking out a credit “builder” card. These are more easily available but typically impose a higher interest rate. One example is Barclaycard Platinum Balance Transfer (24.9% APR).
3. Ensure your address match
It is important your current address is shown on all your financial products, and that this address is registered on the electoral roll. Even if your credit record is clean, your application could be declined because you are not registered to vote. This is because the electoral roll is used by many companies for identity verification purposes to combat identity fraud.
According to Jacqueline Dewey from Noddle, a common mistake is that people describe their address differently from how it appears on the electoral roll. For example, an address may be called Flat 3 on the electoral roll, but you may give it to companies as “top floor flat”.
4. Close unused accounts
Make sure any accounts you do not need or use are closed. Andrew Webb, head of Equifax Personal Solutions, said: “Lenders are paying more attention to the total amount of credit available to an individual and while you may not be using them, these accounts could affect your ability to get credit.”
5. Pay parking fines on time
While the connection might not seem obvious, according to James Benamor at Amigo Loans, if you fail to pay your parking fines and find yourself in court you could receive a black mark on your credit report should you lose. He said: “You won’t be able to remove this from your report afterwards either. It’s rare that this will affect everyone, but it’s something to bear in mind if you do receive a ticket.”
6. Don’t move too often
Changing address, job or your bank account can affect your credit score. “If you’ve moved address a lot recently and changed your job, that may unnerve lenders as they don’t like to see a lot of change in your situation and may reduce your score,” said Pennells. “One broker recommends not changing bank accounts before applying for a mortgage, especially if there has also been a change of job or house move. The longer you’ve had your current account, the better.”