With 1 in 3 mortgage applicants turned down we show you 15 ways to improve your credit rating

Thanks to the credit crunch, getting a mortgage is the hardest it’s been for years.
 

Even buyers with good credit histories – who would have had no trouble getting a mortgage a couple of years ago – are being turned down as banks reduce lending to repair their balance sheets.

Credit check footprints

Worse still, if you’ve been turned down once you’re more likely to be turned down again.  That’s because each credit check leaves a footprint on your credit report and banks don’t trust a lot of activity in a short space of time.

They assume that a number of credit checks means your other applications have been turned down or – even worse – that your application may be fraudulent.

And with each successive credit check your chances of getting a mortgage become increasingly slim. 

Even a “good” rating may not be enough

Nor does this just affect people with “poor” or “average” credit ratings.  Even those with “good” credit ratings can find them ruined if they apply for products that are reserved only for those with “excellent” ratings – such as the best mortgages on offer.

By now, you’re probably thinking that this sounds pretty unfair and you’re not alone.  There is pressure to change the way the system works and stop it penalising people unfairly.  Unfortunately, for the time being we’re stuck with it.

Fortunately, there is something you can do about it.

Below we set out:

1) how to avoid getting into a rejection spiral that ruins your credit rating

2) 15 ways to improve your credit rating

1)  Avoiding the rejection spiral

First check your Credit Record  

Before applying for a mortgage check your credit report with Equifax and Experian, the main credit reference agencies.  This can be done for free.  You will be able to see whether your report contains anything out of date or misleading or even if mistakes have been made. 

Applications in your name that you did not make may mean your identity has been stolen and used fraudulently. 

If you find anything to worry about you can take then this up with the credit reference agency and get the record put straight.

Doing this before putting in a mortgage application will help you avoid being turned down because of something that shouldn’t have been on your record in the first place.

Insist on “quotation searches” instead of “credit checks”

Often people shop around for the best mortgage without realising that their enquiries are being registered as multiple applications.

Then, when they finally choose a product to apply for, they get rejected because of the “multiple applications” they have recently made.

This rejection counts as yet another application, which shows up when they go to the next lender and so the vicious spiral continues.

By insisting on a “quotation search” you can avoid this problem.  Unlike a “credit search” this will not have a negative impact on your credit score. 

Unfortunately, not all lenders use quotation searches.  If a quotation search is not an option then consider how much you want the product and whether a quote is worth getting.

2)  15 ways to improve your credit rating

Having avoided the rejection spiral there are a number of steps you can take to actually improve your credit rating.

• Check your credit rating

If you haven’t already done so, this is the first thing to do.  As well as seeing what information the banks are seeing about you, you will be able to get the credit reference agency to correct any mistakes.

Both the main credit reference agencies Equifax and Experian offer free credit reports on a 30 day trial basis.  The free trial gives you online access to your report, email alerts if it changes and advice on understanding and improving it.

After 30 days you pay around £6 a month for continued access.  Typically, people pay for access to their report while they are in the process of searching for and applying for a mortgage to ensure there are no nasty surprises.

• Ask for “quotation searches” not “credit checks”

This helps you avoid the rejection spiral – see above for an explanation.

• Get on the electoral roll

Companies check the electoral roll to combat identity fraud so if you’re not on it you’re unlikely to get a mortgage.

Contact your local council to make sure you’re registered.  Foreign nationals who are not eligible to vote should send proof of residency to the credit reference agencies and ask for this to be noted on their file.

• Time your applications

We’ve already seen how multiple searches in a short space of time can hurt your credit score.

If you’re going to be applying for a mortgage then avoid putting in applications for credit cards, loans and even things such as new mobile phone contracts or insurance, before doing so. 

Remember, the bank doesn’t see that you’ve changed your phone provider – they just see that there’s been a credit check against your name.

• Build a good credit history

If you have no credit history then you’ll probably be rejected, since there’s no way for lenders to predict whether or not you will repay them. 

To build a credit history from scratch, consider getting “expensive” credit cards, such as Barclays Initial, Capital One Classic, Monument, Aquacard or Vanquis.

While the interest rates on these cards are horrendous (around 30%), they’re easier to qualify for and as long as you pay the balance off in full every month there’s no interest charge.

It’s best to have two cards and to do this for six to twelve months, spending a little each month.  At the end of this time you will have a proven credit history, which should allow you to qualify for better deals.

• County Court Judgments (CCJs)

If you’ve had a CCJ that is now settled, make sure the settlement is recorded on your credit file.  If it’s not get the confirmation details from the court and inform the credit reference agencies.

• Make your payments

Always make at least the minimum repayments and ideally set up a Direct Debit in case you forget.

Pay more than the minimum if possible to reduce your interest burden.

If you are struggling even with the minimum repayments then contact your lender to try and get them rescheduled.  While this will hurt your credit score it’s a lot better than ending up with a CCJ.

• Getting defaults off your file

If a default is on your file unfairly then write to the lender asking them to get it deleted from your file.

If this doesn’t work you can complain to the Financial Ombudsman who can have it wiped from your file if they agree it’s unfair.

Negotiate with the lender to whom you owe money.  You can ask for one of the conditions of settlement to be that the default is wiped from your file.

• Add a “Notice of Correction”

If you can’t get the default wiped from the file and you still believe that it’s unfair then ask for a “Notice of Correction” to be added to your file.  A Notice of Correction is your explanation of why you think the default is unfair.

• Avoid a high balance

Don’t max out your cards.  Lenders will tend to view debt that is more than 30% of your credit limit as excessive and be concerned about your ability to keep up your payments.

• Cancel unused credit cards

Lenders will look at the total amount of credit you have available and be suspicious if you have too much – even if you’re not using it all.  If you have cards you are not using then lower your available credit by canceling them.

Note, however, that long held bank accounts with a good credit history can help your credit score so these should be left open.

• Pay off early

Paying off loans early will be looked on favourably by lenders.

• Joint finances

Being married to or living with someone with a bad credit score should not affect yours, however, being “financially linked” may.

You are likely to be linked to someone if you have a joint mortgage or bank account, but even joint bills for housemates can create a link.

If one partner (or one housemate) has a poor credit history then keep your finances separate to avoid damaging the other’s score.

If you are no longer financially linked to someone then it’s up to you to contact the credit reference agencies and tell them.

• Stability is good

Being a home owner rather than renting helps you get accepted, as does being employed rather than self-employed.  Even putting a land line rather than a mobile number on your application may help.

The longer you’ve been with the same bank, employer and at the same address the better too.  So, if you’re planning on changing any of these it’s better to do so after putting in an important credit or mortgage application.

You should also ensure that the addresses for any open accounts appearing on your credit file are up to date.  Having multiple addresses can hamper ID checks.

• Pay down your existing mortgage

The higher the loan to value (LTV) of your mortgage the more interest you will pay and the harder it will be to get a competitive product if you want to remortgage.

If you have savings that could be used to pay off a significant amount of your mortgage then you should consider doing so.

As well as allowing you to get a better deal, the amount you save in mortgage interest payments will probably be more than you would have accrued on your savings.