HTB makes first timers' credit scores more important
The number of mortgage applications is up 9% on last year but many are still being rejected, according to Experian.
The credit expert says this is in part down to poor credit scores. James Jones, head of consumer affairs at Experian, explained: "Help to Buy has put homeownership on the immediate agenda for would-be first-time buyers who had expected to spend several more years saving for a deposit.
"But a small deposit means lenders are putting even greater stock in your credit score as a guide to how likely you are to meet your repayments, especially as small deposits mean high LTVs, stretching their affordability for young buyers in particular."
The company offers the following advice to would-be home buyers whose credit score is letting them down:
- Don't re-apply for a mortgage until you know why you have been turned down. You should always speak to the lender first to find out why you haven't been able to get a mortgage. Every time you apply for credit you leave a 'search footprint' on your file, which stays there for the next 12 months.
- See if you could improve your rating for next time. Three out of four people who have been turned down for credit don't do this.
- Check everything is accurate and up to date. This includes, whether you're on the electoral roll, accounts you may have thought were closed, and financial ties you no longer have. You should also query anything that is missing from your credit file.
- Start to build a new credit record. If you have a low credit score, set up direct debits to make all payments on rime, use a credit card to pay for your weekly shop and, most importantly, pay it off at the end of the month.
- Don't panic. You can rectify the situation if you have a poor credit score, as lenders tend to focus on your recent credit history.
Your credit score is a three-digit number (ranging from a low of 300 to a high of 850) calculated from the information in your credit report. Your credit score enables lenders to determine how much of a credit risk you are. Basically, a low credit score indicates you present a higher risk of defaulting on your debt obligations than someone with a high score. If you have a low credit score, any products you successfully apply for will carry a higher rate of interest commensurate with this risk.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.