How to Improve Your Credit Score & Your Mortgage Rate
Your credit score plays a crucial role in determining the mortgage rate you’ll be offered. A higher credit score can lead to more favourable mortgage terms, potentially saving you thousands of pounds over the life of your loan. Whether you’re planning to buy your first home or looking to remortgage, taking steps to improve your credit score can make a significant difference. In this blog, we’ll explore practical tips and advice on how to boost your credit score to secure the best possible mortgage rate.
1. Understand Your Current Credit Score
Check Your Credit Report
The first step to improving your credit score is knowing where you stand. Obtain a copy of your credit report from one of the main UK credit reference agencies: Experian, Equifax, or TransUnion. Reviewing your credit report will give you insight into your current score and help you identify areas that need improvement.
Dispute Any Errors
Errors on your credit report, such as incorrect personal information or accounts that don’t belong to you, can negatively impact your score. If you find any inaccuracies, contact the credit reference agency to have them corrected.
2. Pay Your Bills on Time
Importance of Payment History
Your payment history is one of the most significant factors affecting your credit score. Lenders want to see that you can manage your debts responsibly, so making all your payments on time is crucial.
Set Up Direct Debits
To avoid missed payments, set up direct debits for all your bills, including credit cards, loans, utilities, and mobile phone contracts. This ensures your payments are made automatically and on time.
Catch Up on Missed Payments
If you’ve missed payments in the past, bring your accounts up to date as soon as possible. While the impact of missed payments will lessen over time, demonstrating consistent on-time payments going forward will help rebuild your score.
3. Reduce Your Credit Utilisation Ratio
What Is Credit Utilisation?
Credit utilisation refers to the percentage of your available credit that you’re using. For example, if you have a credit card limit of £5,000 and a balance of £2,500, your credit utilisation is 50%. Lenders generally prefer a credit utilisation ratio below 30%.
Pay Down Existing Balances
To improve your credit utilisation, focus on paying down existing balances on credit cards and other revolving credit accounts. Reducing your balances will lower your utilisation ratio and boost your credit score. It may not however improve your borrowing capacity.
4. Avoid Applying for New Credit Unnecessarily
Impact of Hard Inquiries
Every time you apply for new credit, a hard inquiry is recorded on your credit report. Multiple hard inquiries in a short period can lower your credit score, as it may signal to lenders that you’re in financial distress.
Space Out Credit Applications
If you need to apply for new credit, try to space out your applications by several months. This will minimize the impact on your credit score and give you time to improve your score before applying for a mortgage.
Consider Soft Inquiries
Some lenders and financial institutions offer pre-qualification or eligibility checks that only require a soft inquiry, which doesn’t affect your credit score. Use these tools to gauge your chances of approval without risking your score.
5. Keep Old Credit Accounts Open
Benefits of a Long Credit History
The length of your credit history accounts for a portion of your credit score. Keeping older credit accounts open, even if you don’t use them frequently, can positively impact your score by showing a long history of responsible credit use.
Manage Inactive Accounts
While it’s generally beneficial to keep old accounts open, make sure you’re not paying unnecessary fees or charges on inactive accounts. Use these accounts occasionally to keep them active, but always pay off the balance in full each month.
6. Diversify Your Credit Mix
Consider Responsible Use of Credit
If you only have one type of credit, consider diversifying your credit profile. However, only take on new credit if you can manage it responsibly and avoid overextending yourself financially.
7. Monitor Your Credit Score Regularly
Stay Informed
Regularly monitoring your credit score will help you track your progress and alert you to any changes that could affect your mortgage application. Many credit reference agencies offer free credit score tracking services.
Respond to Changes
If you notice a sudden drop in your credit score, investigate the cause immediately. It could be due to a missed payment, an error on your report, or a hard inquiry. Addressing issues promptly can prevent long-term damage to your score.
Final Thoughts
Improving your credit score is one of the most effective ways to secure a better mortgage rate. By understanding your current score, paying your bills on time, reducing your credit utilization, and avoiding unnecessary credit applications, you can boost your creditworthiness and enhance your chances of getting a favourable mortgage offer. Start working on your credit today, and you’ll be well-positioned to enjoy lower interest rates and more manageable mortgage payments when you’re ready to buy your home.