Improve your credit rating!

After years of saving for a deposit, months of hunting for the dream home and countless hours spent searching for the perfect mortgage, there is still one major hurdle to get over in the quest for homeownership - a good credit history. However, it seems that too many would-be buyers in the UK are underestimating this crucial aspect, which means they could be disappointed when they sit down to make a mortgage application.

Credit history warnings

One of the main problems seems to be that many people falsely believe that they have a decent credit history. According to research by Experian, 75% of would-be buyers surveyed said that they believed their credit rating was either 'good' or 'excellent', but when investigated more closely the picture was less rosy.

The research found that 27% of those questioned had one or more missed payments on their credit report, while another 9% had defaults. A further 5% even had court judgements or insolvencies listed. Such things are likely to ring alarm bells with lenders.

Experian's research also found that first-time buyers were particularly weak when it came to borrowing credit and paying it off. Potential first-time homeowners are more than twice as likely to make only the minimum repayments on their credit cards and are very unlikely to clear the balance. Many of those questioned also revealed that they had increased their borrowing over the last year, with 29% borrowing more on credit and store cards in the last 12 months.

All of these factors could raise red flags with lenders. Meeting just minimum payments could be interpreted as a sign of financial stress, while additional borrowing could worry lenders that the applicant will over-extend themselves by adding a mortgage to their debt burden. Many lenders would want to wait and see if the borrower could handle their increased debts before agreeing to grant them a mortgage.

"Lenders are still required to thoroughly assess what you can reasonably afford to borrow and are still likely to have strict lending criteria," warns Julie Doleman of Experian. "A single missed payment or even a defaulted account from five years ago could be the difference between being accepted or declined."

Improving your credit

If you're hoping to climb onto the property ladder, you need to take action. Not only do you need to be aware of your credit rating, but you also have to take steps to make sure that your record is as good as it can be. Take a look at your credit report, if there are any discrepancies, or items you do not agree with, talk to the credit reference agency you're using straightaway.

• Try not to increase your borrowing at least six months before you make your mortgage application. It's also a good idea to bring your overall credit usage down from a year ago. Lenders will want to see whether your borrowing limits have increased or decreased year-on-year.

• Make a budget and stick to it. New mortgage affordability rules mean that your spending and account management will be checked – try to save a little each month and end with a surplus.

• Meet all your repayments and, ideally, pay more than you need to. This will demonstrate to lenders that you are capable of repaying your debts, which will boost your credit score.

To find out more about the mortgage application process, and how to give yours a welcome nudge in the right direction, have a chat with Jacky, our resident expert.