Updated 23 January 2018
When it comes to one of life’s biggest challenges – buying a home – your credit file can be your best friend, or your worst enemy. But maintaining a good credit history can be a tricky balancing act, and you may not realise how easy it is to make yours wobble by accident.
There are many advantages to having a strong credit file – you may qualify for a better credit card, loan rate or even mobile phone contract – but the greatest benefit comes when you buy a home. Your credit history can make the difference between securing a mortgage and being turned down, and can also determine the terms of the loan itself, which may save you (or else, cost you) thousands of pounds over the mortgage term.
Most of us think we have a pretty good idea of what would give us a bad credit score. Defaulting on debts, having multiple credit cards, having high credit card balances, or bankruptcy are just the most blatant ones. But sometimes after a credit check you may be turned down and have no idea why. It’s then that you should consider some of these less-obvious blots on your credit file.
I know, right? Maybe it’s been your habit to avoid all forms of credit, even credit cards. But then you apply for a mortgage and it’s turned – because the lender has no data to go on. Having little or no credit history can be almost as bad as a poor one. So swallow your pride, get a credit card and use it regularly in the year leading up to your application, paying off the balance in full every month.
Whenever you apply for any product with a credit element (e.g. a credit card or mobile phone contract) a record of your application will appear on your credit file. Lots of these within a small space of time can look bad to someone checking your credit history, and lead to rejections. Try to spread them out evenly and remember, fewer is better.
This can have a doubly negative impact. When you arrange to pay for insurance monthly, the provider carries out a ‘hard’ credit check (which will appear on your file, unlike a ‘soft’ check which doesn’t). Also, your monthly payments will cost you more – pay in a lump sum if you can.
It seems you can’t win! Choosing a better provider is meant to be a sign of good money management – but every time you switch, the big gas and electricity companies carry out a hard credit check on you. That in itself won’t necessarily harm your file, but every hard check is a potential black mark on it – so do try to keep them to a minimum.
Incredibly, just getting a quote from a lender can tarnish your file. Some will carry out hard checks by default, all of which end up on your credit history. Always ask if they’ll carry out just a soft search (which won’t appear) if all you want is a quote. If they don’t offer this service, then keep quotes to a minimum.
Can the credit companies really tell if you’ve been late with the bills a few times? Sadly, yes. Many utility companies now share customer data – but you can use that to your advantages, because if you always pay on time then Big Brother will give you a glowing report.
Do you have an old credit card account or mobile phone contract registered with an old address? If any such accounts are still listed as active on your credit file, this can make it look as if you have multiple addresses – a red warning light for credit checks. Close those old accounts or at least update the address on them.
We’re talking store cards and credit cards here. If you’ve acquired a drawer full of them, see which ones you can cancel. But you only want to get rid of unwanted baggage – not the good kind. If you have a card that demonstrates a long and solid credit history, keep it. Just avoid having half a dozen or more cards on the go – it makes lenders jumpy.
This is nearly always a terrible idea – not only will you have to pay interest on the withdrawal immediately (even if you otherwise settle the card balance in full) but it will harm your credit file – lenders see it as a sign of bad money management. Often the big danger is doing it by accident, because you pull out the wrong card. Make sure your bank card has a different PIN and you won’t make that blunder.
You can apply for credit, get rejected, apply again somewhere else and get rejected again. Rejections can be caused by an error on your file, but subsequent rejections may be caused simply by lots of recent searches. Every rejection makes the problem worse. The solution? After your first rejection, check your credit file and find out why. You can’t afford trial and error – you’ll just muddy the waters even more.
For these and many other reasons, it’s vital to get sight of your credit file so you can check all the information held on you is accurate and up to date. Otherwise you can get refused credit and have absolutely no idea why – which is the most frustrating situation of all.
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