Why Is Credit Score So Important?
When it comes to buying your first house, you’re almost definitely going to need to borrow a fair amount of money. Unless you plan on getting rich any time soon, you’ll need to apply for a mortgage.
Now if you were the person lending out the money, you’d want proof that you’d be able to get your money back, right? This is where your credit score comes into play.
To help you get a better understanding, we’ve decided to take a look at what a credit score is and how it can affect you when buying or renting a property.
What Is A Credit Score?
Put into simple terms, a credit score is a number that shows whether or not you are a trustworthy person to loan money to.
Taking into account your credit report and information you have given in your application, you will be given a score in which lenders can then refer to when you apply for the likes of credit cards, loans and mortgages. Your score will reflect on if you’ve previously made repayments on time and how likely you are to be able to keep up payments. It also takes into account your financial history and serves as an overview to a lender.
“How can I check my credit score?”
You can check the state of your credit score using different credit agency websites such as Equifax, Experian or CallCredit who all offer an initial free credit report and score. These are the three main credit references agencies in the UK and each one has a different scoring system.
What Is A Credit Report?
Whilst a credit score is basically a summary of your credit history, your credit report contains all the details of your financial history.
Your credit report will delve much deeper into your history with lending money and gives the lender the chance to look at how you’ve dealt with borrowed money. If you’ve struggled to pay back on time, the report will show this and might appear as a red flag to lenders.
This is why it is so important to maintain a good credit history. If you have a poor financial history, why would a lender be able to trust you with their money?
Now that we’ve established what a credit report and score are, let’s take a look at what is considered a “good” credit score and how you can measure it.
What Is A “Good” Credit Score?
Generally, if you have a high credit score then you are usually seen as low risk, meaning that you are more likely to get approved for a loan.
There are different ways to measure a “good” credit score, with different credit reference agencies using different scoring systems. For example, Experian’s credit score runs from 0 – 999 and can determine how much interest you will have to pay on your loans. Here is a breakdown of their scoring system.
• 0 – 560 = Very Poor
• 561 – 720 = Poor
• 721 – 880 = Fair
• 881 – 960 = Good
• 961 – 999 = Excellent
Taking these scores into account, anything close to 900 or above will more than likely get you a good deal on loans and mortgages, with the mid 700’s getting you a decent but not great deal. Anything under 600 is not looking good and you may end up struggling when applying for credit.
You can check your credit score with different agencies to get different scores. For example, Equifax scores you out of 700 and uses the scoring system below.
• 0 – 278 = Very Poor
• 279 – 366 = Poor
• 367 – 419 = Fair
• 420 – 466 = Good
• 467 – 700 = Excellent
If your credit score is lower than you’d hoped, it’s not over yet. On the flip side, having a great credit score doesn’t necessarily guarantee you a loan either. There are ways you can improve your score, but we’ll talk more about this later on. Let’s take a look at how your credit score affects the property industry.
How Does It Affect Buying A House?
When it comes to buying a property of your own, your credit score will play a huge factor in whether or not you can secure the funds to getting your dream home. In order to purchase your house, you’re going to need a mortgage.
For those not in the know, a mortgage is a loan that is paid back over a number of years and allows you to actually afford to buy a house. We haven’t all got a couple of hundred grand lying around.
Most mortgages will take around 30 years to pay off with being such a large sum of money. The money tends to be taken in monthly payments, as if you were paying rent. But lenders aren’t about to just give you the full payment without you chipping in first.
The majority of mortgages won’t fully cover the price of your house, so a deposit from yourself will be needed. Deposits can vary for different properties, but most will require at least 5-10% of the property price. The more money you can put down initially the better, as paying a bigger deposit will get you better mortgage terms.
How Does It Affect Renting A Property?
Your credit score not only affects your ability to purchase property, but also extends to renting. A landlord needs to know that you will be able to pay the rent at the end of each month, so you can imagine that your credit score is something they will refer to.
According to research from ClearScore, 62% of landlords agreed that a tenant’s credit score was the most important factor when decided whether to rent to them. So if your credit report shows the likes of missed or late payments, your application will more than likely be denied.
This shows that it is more important than ever that you maintain a good credit score, especially if you’re looking to get into property.
How Can You Improve Your Credit Score?
If you happen to have a low credit score, it’s not necessarily the end of the world. There are a couple of different ways you can improve your credit score, so let’s take a look at some.
One of the easier ways to get your score in the higher numbers is to take out smaller forms of credit such as a mobile phone contract or credit cards. These kinds of loans are easier to obtain and you’re more likely to be accepted. By maintaining a solid form of repayment, it shows that you can be trusted to meet a payment deadline each month.
Other ways to improve your credit history is by applying for an overdraft on your bank account and keeping within it’s spending limits, trying not to miss any payments and even getting yourself on the electoral roll.
Improving your credit score isn’t going to happen overnight, so it’s important to keep at it. If you can maintain payments and prove you can be trusted, then you are more likely to get approved for a mortgage and get yourself that dream home.