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Adverse credit - putting it right
If you are refused a mortgage
as a result of a poor credit rating,
there are some very tangible ways to rectify the problem. Laura Brady looks at
the top 10 ways to improve your credit score.
The process of
getting a mortgage – albeit draconian – at least used to be straightforward.
It began with making an appointment at your local building society. Then, if you
had a job, enough money in savings, and the manager gave you the seal of
approval, you took whatever mortgage you were offered – and gratefully.
Then came along two things that would change the face of mortgages forever. The
first is the rise of consumer borrowing which, according to the Council of
Mortgage Lenders has increased by 52 per cent in the last five years. (At the
end of March 2006 it totalled £4,107 for each UK adult.) The second is the
technology of transferring data remotely through computers. In short, if you
have not managed the former satisfactorily, the latter would let it be known at
the touch of a button.
A growing number of people are
refused a mortgage from a mainstream lender as a result of an unsatisfactory
credit rating. If this happens to you, there are still avenues available such as
a more expensive sub-prime mortgage. But before you start re-evaluating your
sums, look at these top 10 ways to improve your credit score…
1. Get a copy of your credit report
The very first step is to obtain a copy of your credit report from credit
reference agencies, Experian or Equifax. This is usually easiest online but you
can also obtain your file by telephone (see contacts for details). “As an
individual you may feel powerless, but armed with your credit file you will be
able to understand the lending process and make a start on improving your credit
rating,” says Neil Munroe, external affairs director at Equifax. “This puts you
in a strong position to make the right decisions for your particular financial
situation. And just by understanding how lenders make their decisions, you can
be forearmed and forewarned.”
Although you can now buy your credit report in varying levels of detail from
either agency – you can even set up an alert online if any changes occur to it –
it is your legal right to buy the standard version for a £2 fee.
2. Put yourself on the electoral role
Registering yourself at your current address by getting your name on the
electoral role is one of the easiest means of helping your credit score. It
takes a simple call to your local council, costs nothing, and – as long as you
can produce adequate proof of your address – you cannot be refused! “You will
also need to be on the electoral role when it comes to voting so you’ll be
killing two birds with one stone,” says James Jones, consumer affairs manager at
Experian. “Something this simple will, at the very least, serve in avoiding
delays with your mortgage application.”
3. Check your address is written correctly
Even if you are on the electoral role, if the address given on an application
form doesn’t match the address held by the credit reference agency exactly, this
could result in an unnecessary refusal. For example, if are you using a house
name rather than a number – or the other way round.
4. Make outstanding debt repayments on time
Regardless of the level of your existing debts, it is essential that you meet
the repayments on time. The best way to do this is by setting up Direct Debits
for the minimum repayments, says Jones. “You can always choose to pay more but
it is only the regularity of payments that will repair your credit rating, not
how much you pay. And a Direct Debit is the closest way to ensuring this.”
5. Check that improvements to your credit score have been updated
If you have paid off debts recently – especially where they have been referred
to a debt recovery agency – check to see your credit file has been updated
accordingly. If you had debt with the courts (known as a County Court Judgment
or CCJs) over the last six years and they been paid off (or ‘satisfied’), ensure
this development has also been recorded. “It doesn’t always happen
automatically,” warns Jones.
6. Find out if anyone else is affecting your credit score
If you have had a joint finance agreement in the past with a partner, sibling,
friend or dependent, their credit history may be affecting yours. If you no
longer have any joint financial agreements – and you can prove this – you can
remove the other person’s credit history from your credit file by submitting a
‘notice of disassociation’ to the credit reference agency. This can only be done
once any joint accounts that financially link you with the party in question,
have been settled.
7. Seize the chance to explain
Many credit problems arise as a result of a life changing event such as death,
divorce or the sudden loss of a job. If you feel an explanation of your credit
problems will help your case you also have the right to add what is called a
‘notice of correction’ to your credit file. This is literally a self-composed
note of up to 200 words. “When lenders carry out credit checks it usually
amounts to simple number crunching – and the answer will just appear on the
computer,” says Jones. “A notice of correction will flag up as something that
needs to be read. This adds a human element to the decision and, if you were on
the margins of acceptance, could prove beneficial.”
8. Prove that you can borrow responsibly
Although it might sound unfair, if you have had no history of borrowing in the
past, this will probably hinder your chances of being accepted for a mortgage.
This is because the lender is left without proof that you can service a loan
successfully. In this case it can actually help to take a credit card and pay it
off in full each month.
9. Ensure you don’t make things worse
Most lenders will take any mortgage application through to the stage of
agreement in principal, which leaves a ‘footprint’ on your credit file. If you
are refused a mortgage and you decide to try the lender next door, this
footprint will be noted. “Although it won’t change the contents of your credit
file, it looks unhealthy to have too many recent searches – and you may be
refused for a second time just on this basis,” says Mark Chilton, chief
executive at mortgage broker, Purely Mortgages.
Ask the lender if its basis for refusal was related to credit or affordability
problems. If it is your credit score that’s the problem, you can minimise
further damage by going straight to a mortgage broker that deals in specialist
mortgages. “But in this case, ensure you use a
broker that
deals in standard loans as well as non-standard,” advises Chilton. “Sometimes
when credit problems are very light – such as one satisfied
CCJ or a single default on
a loan repayment – some high street lenders will accept the application.” Abbey
is a good example of a lender that takes a flexible approach to light credit
problems.
But no situation should justify going to a so-called credit repair organisation
according to Jones. “These are usually cowboy outfits,” he says. “For a fee,
they claim to be able to remove CCJs from your credit file as they have a
special arrangement with the credit reference agencies. But it’s absolute
rubbish. If a CCJ could be removed from your file, it would be done so free of
charge.”
10. Keep your chin up
Granted – keeping your chin up will not make one iota of difference to your
credit score but keep in mind that even the worst type of credit damage such as
bankruptcy or Individual Voluntary Arrangements (IVAs) will only stay on your
credit file for a total of six years, providing they have been discharged. Bad
credit no longer constitutes a life sentence – inside a prison or out.
Going forward with a sub-prime mortgage anyway?
Ironically, even the most fearsome credit score will not prevent you from taking
some kind of mortgage, but it will be from a specialist lender and you will pay
for the privilege with an interest rate that could easily amount to double that
of a competitive high street deal. “The lender will also want a sizeable deposit
and a high level of affordability to mitigate the risk,” says Chilton.
But when it comes to tie-ins – whatever your credit situation – three years
should be the maximum. This is because, providing that you have kept up
repayments religiously over this time, your credit rating should have rectified
itself to qualify for a much better deal – even from a selection of high street
lenders.
Experian
www.experian.co.uk
0870 241 6212
Equifax
www.equifax.co.uk
0870 010 0583
Published July 2006
This article has appeared in Mortgage Magazine which is available in all good newsagents. Copyright MSM International Ltd
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