06 June 2019

Beginners guide to credit scores

If you’re searching for a new home, you’ve probably heard the term ‘credit scores’. You may be wondering why credit scores are linked to home buying and why having a good credit score is so important when buying a home.
We’ve put together a beginners guide to credit scores. By the time you reach the end of this blog, you should hopefully understand what a credit score is, why it impacts your ability to buy a home, how to improve your credit score and bust some myths you may have heard around credit scores.
Lets get those questions answered and help you move forward on your home buying journey!

What is a credit score?

Lets start with the first question you’re probably asking. What actually is a credit score?
Your credit score is basically a number that reflects the risk a lender takes when you borrow money. This is generated from information held in your credit report (aka your credit file).  
Some people like to refer to their credit report as their ‘financial CV’. Your credit report will hold information such as your credit accounts (late payments, loan accounts), financial connections (eg. joint bank accounts), and your current and previous addresses.
Lenders will review your credit report and assess whether or not they think you’re a reliable borrower.

Why does my credit score matter when buying a home?

When you take out your mortgage, your credit score can affect your ability to qualify for a mortgage. Although it’s not the only thing your lender will look at, it can stop you from passing a mortgage application.

How do I check my credit score? 

Getting hold of your credit score is actually easier than you’d think, and most of the time, it’s free!
You can check your credit score with Equifax, Experian or TransUnion. These are the three main credit reference agencies and will be what your lender references when evaluating your credit.
Both Equifax and TransUnion offer a free membership and you can request your credit score as and when you like. With Experian, you can sign up for a free 30 day trial, but after that you are charged each month for your membership.

I’ve never had a credit card. Does this mean my credit score will be good?

Despite the myths, that is false! Most of the time, lenders will ask for evidence of you managing credit responsibly. If you have no history of borrowing money on credit, the lender will see this as a risk because there is no proof of you being able to pay on time.
Your credit score is all about a lender ensuring you’re a reliable person to lend money to. If you’ve never borrowed money on credit, the lender can’t see any evidence of you being reliable or efficient.

How long does it take for my credit score to go bad?

A common misconception around credit scores, is that it takes a long time for your credit score to go bad. This isn’t true!
It only takes a few months to ruin a good credit score. If you leave credit for over 180 days, your account will be ‘charged off’. This means that the lender has given up on being repaid according to the original terms of the loan. If you have a loan or have borrowed money and it’s marked ‘charged off’, it’ll hurt your credit score.
You can remove the charge-off from your credit report by contacting your original creditor to see if you can pay them directly or make new payment arrangements. This process isn’t an easy one, which is why its important to pay off your bills as soon as they come in.  

How can I improve my credit score? 

Now you know how important a good credit score is when buying a house, you might be wondering how you can improve yours. Worry not! Below are some top ways to enhance your credit score without too much work!

Register on the electoral roll

The electoral roll is an official list of the people in a district who are entitled to vote in an election. If your name’s not on there, it’ll be much harder to get credit. You can get registered at any time of the year, completely free. If you’re not registered, you can register online or via post. If you’re not sure whether you’re already registered, you can check by contacting your local electoral registration office.

Clear your debts

If you have any existing debts, you should try clear it before applying for new credit. Lenders (banks, building societies) will be less likely to lend you money if you already have a lot of existing debt.
Clearing your debts and having fewer open accounts will also help lower your credit score.

Pay bills on time

Whilst clearing your debts is important, so is paying all your bills on time. In fact, it’s one of the biggest contributing factors to your credit score. Everything from phone bills to phone landlines, Internet contracts to insurance, needs to treated as a priority. This proves to lenders that you’re capable of managing finances efficiently. If you’re worried about paying bills on time, here are some ways to remember:

Set up payment reminders

Some banks actually offer payment reminders through their online banking portals. They can send you an email/text to remind you when your next payment is next due.

Or, if you want to take matters into your own hands, you can use your smartphone to remind you!
Create a finances spreadsheet
Putting together a spreadsheet of your in-goings, out-goings and everything in the middle, will not only help you to remember what you need to pay, but it’ll help keep you more organised too. If you organise your finances before they need to be paid, you can work out how much disposable income you have for the month.
Fraudulent activity
Once you have a copy of your credit report, you should thoroughly check for any mistakes. If there is any mistakes, or something that doesn’t seem quite right, you should flag this up to a credit bureaus. You can then request the right to action the fraudulent activity and file a ‘fraud alert’.  
Check your file for any mistakes
Double, triple and quadruple check your details! Even a small mistake can impact your report, so making sure your details are correct could actually improve your score.
If you do spot any mistakes, you can report them to the credit reference agency. They will review your report for 28 days and then either remove the incorrect information or tell you why they don’t agree with you.
Home address
Lenders will feel more comfortable if they see that you’ve lived in one home address for a considerable amount of time. This is important to bear in mind when trying to improve your credit score, as it will prove your stability and reliability.
Check your joint accounts
Sharing a joint account with a spouse, relative or friend could affect your credit rating. If the other person has a poor credit score, this could actually affect yours too, so it’s important to bear this in mind.