For many people in the UK, their first encounter with credit scores is when they start looking at how to buy a house. Why? Because their credit score can give them a pretty good indicator of how likely they are to be successful in applying for a mortgage.
What credit score do you need to buy a house? The short answer is that there isn’t an agreed-upon minimum credit score you need to be successful in your mortgage application. The long answer is of course, much more complicated. But I’ll try to make it as painless as possible. Stick with me.
What is a credit score?
The first thing to bear in mind is that you don’t actually need a credit score to get a mortgage. What you need is a credit history. I explain the difference in this video:
Got that? Here is a short summary of the key points discussed in the video:
- You don’t actually need a credit score
- You need a credit history
- Credit reference agencies compile and store your credit history
- The three main ones in the UK are: Experian, Equifax and Transunion
- They collect lots of information on you, to include details on your financial standing, your address history, any people you are financially linked to and your credit agreements
- They keep a record of payments made on time, and missed – as well as how much of your available credit you’re using (known as your credit utilisation rate)
- When lenders, like banks, are considering your mortgage application, they request your credit history from the credit reference agencies
- The lenders run their own algorithms on this data to assess your creditworthiness – they want to know how reliable you’ll be in making your monthly mortgage repayments on time
- They will also assess your affordability based on other information you provide in your application form (more on this later on)
- They use this to help make a decision on whether to lend to you or not
- To help individuals understand what their outcomes might be before they apply for credit, the credit reference agencies invented the credit score
- The credit score attempts to recreate the lender algorithm to generate an indicator for how likely you are to be accepted for credit (like a mortgage)
What is a good credit score?
Each of the three credit reference agencies generates its own credit score for you. This is because they are independent of one another, and so their formula for calculating creditworthiness varies.
That said, there are similarities in that each agency tends to place you in one of five brackets: Excellent, good, fair, poor or very poor. Experian’s score is out of 999, TransUnion’s is out of 710 and Equifax is 1000.
Unfortunately while we all aspire to be excellent, that’s not always the case, and it isn’t always our fault. Many young people who have never held credit agreements may find that their score is low owing to not yet having built up a credit history. With nothing to go on, lenders are unable to gauge your creditworthiness reliably. Others may find they encounter a few setbacks as a result of mistakes they made years ago.
Whilst it’s not necessarily impossible to get a mortgage if your credit score has room for improvement, it is likely that any deals offered to you would have higher interest rates (and therefore be more expensive), than those offered to someone with a good credit history.
What is my credit score?
If you’re not sure what your credit score is, it’s free to check your credit reports online. Try it now using the following services:
- ClearScore (uses Equifax data)*
- Credit Club (uses Experian data)
- Credit Karma (uses TransUnion data)
We recommend checking all three as reports vary. When looking at your credit reports also be sure to check that everything is correct. Errors on your report can damage your credit score, and prevent you from being able to take out credit agreements.
* Just to be super transparent if you sign up and follow this link although it’s free for you, Loqbox may get a small referral fee from ClearScore. This helps us to continue to improve our service for our customers and keep Loqbox free.
Improve your credit score ahead of a mortgage application
Improving your credit score ahead of a mortgage application can improve your likelihood of success. But be warned, this is not something that can be done quickly. It will take several months at least, and for some it can take years. But it is worth it. Here are a few things you can do:
1. Register to vote
Getting on the electoral roll is absolutely essential if you want lenders to approve your application for credit. If you’re eligible to vote, then register here. If you’re already on the electoral roll, then be sure to check that this is shown in your credit report. If it’s not then you’ll need to get in touch with the relevant credit reference agency to ask them to correct it.
2. Make all your payments on time
It’s an obvious one, but it’s an important one. If you’re planning to apply for credit soon, then make sure your credit report demonstrates that you are dependable when it comes to making your payments on time.
3. Maintain a healthy credit utilisation rate
When they assess you lenders will look at how much of your available credit across all accounts you’re currently using. According to ClearScore, ‘keeping it under 30% (or even better under 20%) is typically a good strategy.’ And ‘if you use between 50% – 75% of your credit limit, it will show up as an ‘amber flag’ on your credit report, meaning it may have an effect on your credit score.’ You can find out more about credit utilisation rates here.
4. Demonstrate you can handle credit
If you have no credit history, then how you manage credit is an unknown to lenders. They view this as high risk and will be unlikely to agree to lend to you. This is what is known as being ‘thin file’ or ‘no file’ in the industry. To change this, you can build your credit history by taking credit. Credit-building credit cards can be useful tools in doing this, though it’s very important to know what you’re doing with them. You can also try Loqbox. Loqbox makes it easy to grow your credit score. Find out more about how Loqbox can help here.
Other factors lenders use to make their decision
Your credit history, although important, is one of a series of factors that lenders will examine when deciding whether to lend to you or not. Beyond this, they will also be assessing your affordability. To do this they will need a whole bunch of information from you to understand your lifestyle, primarily in terms of income and expenses. In particular they will want to see payslips and bank statements. They will also take into account whether you have anyone financially dependent upon you, such as spouses or children. Further, they will assess your resilience were things to change, such as if interest rates went up, to check that you could still make the payment. For more on how lenders assess affordability check out this article.
I hope that’s been helpful, and if your big goal is to get on the property ladder, then good luck!