It’s just one number, but it can affect so much of your life – looking after your credit score should be one of your most important financial considerations. There are many myths and suspicions around credit scores relating to how they are formed, how they can be changed, and what it means with regards to borrowing money.
Imagine that you were interviewing two candidates for a job. One has had a mixed work history with positives and negatives, another has no experience at all. To whom would you be more likely to give the job? Chances are that it would be a tough call. Now apply that to a credit rating, and imagine you’re a lender – you might be just as unwilling to lend out money to someone who has not shown any skill in managing money and debts to someone who has had an up-and-down financial history.
Lending is predicated on what the lender believes you will do in the future, and whether you will pay a minimum amount on time, every month. This is especially true when one looks at mortgages and an amount of hundreds or thousands of pounds every month, especially when one considers that people’s lifestyles and situations change. As might the Bank of England base rate – although it hasn’t changed yet, a rise or fall of a quarter of a percent would translate to mortgage payment increases for millions of people nationwide, with no power to do anything about it.
A common myth is that there is a universal credit rating for everyone, when in reality each credit company has its own criteria for building a score based on your credit file, and each lender may then use these credit scores differently. Each applicant’s credit file is essentially a number or series of numbers in a giant system, built upon a huge range of factors including past borrowing history, salary, age, whether you are present on the electoral roll, and the number of accounts you have, among other pieces of information.
Your credit file is a huge part of whether you’ll get a mortgage or not, and if it’s poor you simply won’t be accepted – you’re not worth the risk. Since the economic trauma of the late noughties mortgage lenders have become more wary, and in 2014 the Financial Conduct Authority introduced new rules known as the Mortgage Market Review to crack down on a previously more lax system of lending
If you are applying for a mortgage you will be subject to an interview where you will be asked about spending habits on anything from pets to cigarettes to subscriptions, and the lender will then make a decision – so even if your credit file is spotless, if the interviewer is unsure about your ability to pay a mortgage, you might be disappointed. Some experts advise starting to manage your credit file a year or so before making an application, and by doing this it might also convince you to keep a tighter rein on your money – which will likely translate to a more successful interview. Even if that means taking out a loan from Avant Credit, GiffGaff or other company and specifically building a credit file, that year of managing credit might be worth it.