How Does My Credit Score Affect My Mortgage Application

Monday 9th October 2023

(information contained within was correct at the time of publication but is subject to change)

If you’re hoping to apply for a mortgage soon, have you considered your credit score? It may not be the first thing you think of, but it’s worth knowing exactly how your credit score affects your mortgage application.

In this article, we’re going to be running through what exactly a credit score is and how it’s linked to mortgages.

Having a good credit score will improve your chances of applying for a mortgage, and so, we’re also going to be walking you through different strategies that will allow you to improve your creditworthiness.

Be sure to read through this article in full to understand the importance of a credit score when applying for a mortgage. In doing so, you could save yourself lots of time and stress in the long run.

Understanding Credit Scores

What is a credit score? A credit score is a numerical figure that predicts your credit behaviour. The simplest way of understanding your credit score is to see it as a predicted likelihood of you paying back anything you have borrowed on time.

This links to creditworthiness. Which is a measure of how likely you are to repay any money borrowed. This helps lenders to figure out how suitable you are to receive financial credit.

As your credit score is displayed as a number, you may be wondering how this number is calculated, and that is through a credit reference agency. There are a few different credit reference agencies, and they all have their own method to calculate an individual’s credit score.

However, to work out a credit score, these credit reference agencies all rely on a credit report. These are the factors that make up a typical credit report:

• Personal information: This allows creditors to learn more about the person behind the credit.

• Credit history: How you’ve managed credit in the past is a good indicator of how you will manage credit in the future.

• Credit checks: Lots of credit checks could paint a negative picture of how you manage your finances. (More on this later).

After going through your credit report, you will be provided with your credit score. As your credit score is based on how you use credit and manage finances, the figure you are first presented with is not set in stone.

Over time and as your financial habits change, your credit score will change. This means your credit score can go up or down, so it’s good practice to check your credit score regularly.

The Importance of Credit Scores in Mortgage Applications

For most people, a mortgage is the biggest loan they will ever receive. Looking at this from a lender’s point of view, they will want to ensure that debt will be paid back. And as credit scores are based on credit reports and similar references, your credit score could indeed stop you from being approved for a mortgage.

When you apply for a mortgage, you will be expected to provide all of the relevant documents and pieces of information. Such things as bank statements and pay slips. These assets help to show the lender what situation your current finances are in.

But remember a mortgage is a multi-year contract, so as useful as it is to a lender to know how much money you are making and how you’re managing your finances currently, they also need to predict how you will behave in the future.

To achieve this, they will analyse your credit history through credit reports and your credit score. All of these factors play a big part in the assessment process.

Ultimately, mortgage lenders use your credit score to help them decide whether you meet their requirements to afford a mortgage with that particular lender. If your credit score is too low, you could be denied a mortgage or offered less desirable terms, such as higher interest rates. 

Improving Your Creditworthiness 

As we mentioned earlier in this article, your creditworthiness links to your credit score as this — along with your credit report and payment history — will determine your creditworthiness.

It’s important to know that creditworthiness is something that can be improved. Here are some of the best ways you can improve your creditworthiness to build up your credit score.

1. Lengthen Your Credit History 

Credit history is something that has to be built – it doesn’t come out of nowhere. There are multiple ways that you can build on your credit history. This is a common goal of young people hoping to take out a loan to become a first-time homeowner.

You can build your credit history length simply by opening a bank account and managing it well. If you have an overdraft, stay as far away from the limit as possible and pay it off as quickly as you can.

Another popular way of building a credit history is by getting a credit card. After managing your bank account well, your bank may offer you a credit card. By using it and paying it off each month, you’ll build a positive credit history. 

2. Regular Payments

To improve your creditworthiness, making regular payments on time and making them in full is best practice. When lenders see an old account that has been well looked after, showing regular payments have been being made, it’s a good sign and will usually lead to a higher credit score.

3. Get on the Electoral Register 

This is the simplest way of helping your creditworthiness. By registering on the electoral roll, you’re proving your name and where you live, which is helpful for lenders.

4. Credit Utilisation 

The percentage you use up on your credit limit, say on a credit card, is known as your credit utilisation. You want to keep your credit utilisation as low as possible. Around 30% is ideal. 

Here’s an example: If you have a credit limit of £1,000 and you’ve spent £500, your credit utilisation is 50%. So for a credit utilisation of 30%, try not to spend over £300 of your £1,000 limit.

This shows lenders that you are responsible with your credit. And as a result, you will be rewarded with a positive impact on your credit score. 

5. Review Your Credit Report

Your credit report plays a massive role in your creditworthiness, which is why it’s advised to review your credit report. Look for mistakes and check that everything is in order because even the smallest error could affect your credit score.

A lot can happen in our lives, so keeping your credit report up to date so it accurately displays your current information is vital.  

6. Credit Checks

There are hard credit checks and soft credit checks. Both forms of credit checks show that someone has accessed your credit information and when. The difference between a soft and hard check is that a soft check has no effect on your credit score but a hard check can affect your credit score. 

Why does a hard credit check potentially affect your credit score? Because a hard check typically happens when you apply for new credit, potentially leading to a higher credit risk. The thinking behind this is that if an individual is asking for more credit, that means they are likely struggling financially. 

Whereas with a soft credit check, you are not applying for more credit. The reason for this credit check may be that your lender wants to pre-approve you for a credit card or something similar.

To be on the safe side, limiting excessive credit checks is considered best practice as you’re less likely to be considered a high credit risk. 

The Role of Credit Scores in the Mortgage Pre-Approval Process 

Your credit score plays a massive role in the mortgage pre-approval process, and it’s typically where lenders will start. Throughout this article, we’ve established that your credit history will affect your mortgage application. A credit score is the best indicator of this.

To be approved for a mortgage that offers lower interest rates, lenders will usually look for a score in the middle to high range. The credit score ranges are usually as follows:

• Poor (the low end)

• Fair

• Good (the middle range)

• Very Good

• Excellent (the high end)

There are multiple steps to a mortgage pre-approval process, meaning that having a good to excellent credit score will set you off on the right path. Which will ideally lead to lower interest rates.

Debt Consolidation and its Effects on Credit Scores

Debt consolidation is a way of managing any debt you may have accumulated more effectively with lower interest rates.

With debt consolidation, a person can combine their outstanding debt into a whole new loan. Instead of paying off multiple loans or credit cards monthly, you pay off all loans in one with a single monthly amount.

But be warned, debt consolidation can affect your credit score. Because, essentially, you are taking out a new loan (the debt consolidation). And with that, your credit score can be affected. For this reason, debt consolidation may not be a viable option.

Final Thoughts on Credit Scores and Mortgage Applications 

The effect your credit score can have on your mortgage application is just one of the reasons we implore you to check your credit score regularly. A credit score offers lenders a quick and mostly reliable way of understanding if you are suitable for a mortgage.

Paying attention to your creditworthiness and taking advantage of the ways you can improve it are key takeaways of this article.

It’s important for you to remember that your credit score is not a jumble of random numbers, but a representation of your financial management and credit responsibility.