We've all been there.
You apply for a credit card or a loan, and they start to process the application.
Your heart rate rises just a touch.
You hold your breath.
And then, after what feels like an age, the application passes.
Or it doesn't.
It's almost as if you have no control over whether they say yes or no.
What are they even searching for?
Particularly with a mortgage application.
An overdraft or a credit card probably isn't life-changing for you. Whether you're accepted or declined on the application won't have a massive impact.
Whereas if you're applying for a mortgage, it's huge.
It's the deciding factor. Can you buy the property you've got your heart set on or not?
Are you moving, or will you have to stay where you are?
You might already have accepted an offer, and now you'll have to withdraw!
How can you ensure that there is a yes when applying?
Firstly, we need to understand what the lender is considering when making the decision.
It starts with a credit score.
What is your credit score?
We each have a credit score. A sort of footprint that shows our financial status. This is used to decide whether we can manage our money in a way that the lender approves.
Every time we use our money, whether buying something significant or just a supermarket food shop, we leave a little imprint on our credit profile.
But the key thing the lender is looking for - did you have the money available to spend?
Or are you overdrawn?
Do you go overdrawn regularly?
And sometimes, do you actually spend MORE than the amount of your agreed overdraft?
Do you have credit cards?
How much is the outstanding balance? And are you making regular payments to pay off the debt?
This pattern of behaviour is monitored by a numerical score. And it's that score that the lenders are searching for initially.
Why does it matter?
It's important to a lender because it helps paint a picture of how you manage money and, therefore, whether they think you'll be a worthy candidate for a loan. Basically, how likely are you to pay the money back?
In the olden days, a bank manager would make this decision in person. You'd have a meeting, and they would make an individual assessment of your application before deciding whether you can have a loan or not.
Of course, as times have moved on and many more people borrow money, this process is simply not practical. So, every person has a credit score, and this decision can be made quickly, online, without the need for a face-to-face meeting.
What are the repercussions if you have a low credit score?
A low credit score means you haven't managed your finances in a way that the lender deems to be correct.
This could be that you have missed a few payments on your credit card, or it could mean that you have debts that are too high to manage. Or worse, it could be that you have loans that you haven't paid back and have been issued a County Court Judgement (CCJ).
This would likely mean that you wouldn't be considered for a loan or a mortgage and could prevent you from buying the property you want.
You might have to abandon the idea of buying property altogether.
What can be done to improve it?
Having a low credit score can be quite debilitating in the modern world. It will mean that you may not be able to have an overdraft or, in extreme cases, even a bank account.
It could mean you can't get a mobile phone on a contract and will have to use a pay-as-you-go arrangement.
It could also mean that your utility bills must be on a key meter rather than a monthly direct debit. These options are also penalised with higher costs per unit, so it will cost you MORE for everyday things.
But don't despair.
Although it will take time to improve your credit rating, it is possible to sort it out.
1) One of the first searches is for the electoral roll - this is searching to check that you are an actual human. If you're not registered on the electoral roll, you're starting off on lower points before they've even looked at your finances.
So, get registered on the electoral roll.
2) Points are deducted if you have lots and lots of addresses. Your addresses for the last 3 years are searched for, but it is a red flag if you move every few months, so try to stay put if you can.
3) Get control of your debts. If you have high-interest payday loans, clear these off first. Then start to pay down as much as you can from credit cards.
And stay out of your overdraft if possible.
Focus your efforts on one thing at a time as the credit score is boosted each time you clear something off entirely.
And make the minimum payments on all other debts.
Then pick them off one at a time.
Ideally, a lender, particularly a mortgage lender, is looking for no other debt except the mortgage. Of course, this isn't always practical, but it will stand you in good stead if you can aim for this ideal circumstance.
4) When you have control of your debts, it's time to repair the damage. You might even see your monthly cash flow improve, too, as you're not making so many payments to other debts.
So with your newfound cash flow, what can be done to repair your credit score?
A word of warning - you must be disciplined!
Take a credit card, and use it for one thing. Either fueling your car or buying groceries - nothing else. Arrange for it to clear the balance in full every month.
This shows your credit profile that you have credit and can pay it off.
Each time you do this, your credit score will increase.
But you must be careful.
It takes serious dedication not to overspend on a credit card so that you can't physically clear off in one month. And before you know it, you're back to making minimum payments each month.
If you've been declined for a loan, or any kind, and want to repair your damaged credit score, follow these tips, and you'll be the picture of financial health in no time.
And if you think you've got everything under control and are ready to take out a mortgage, get in touch with us. Whether you want to speak to a mortgage advisor or to be kept informed of new properties as they come to the market.