Everybody knows that to get a mortgage, you need a good credit score. Many first-time buyers have first-hand experience of being turned down for a mortgage over bad credit. So, you might be wondering, how does it all work? What separates a good credit score from a bad credit score? And is it possible to get a good credit score from a bad one?
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How credit scoring works
Credit scoring is relatively simple. It uses a statistical model to predict the likelihood that a borrower will default on their loan. In other words, lenders use it to assess whether you can pay back a loan. A credit scoring algorithm can work this out this by looking at your history of borrowing and whether you’ve paid back what you’ve borrowed.
The most common statistical model lenders use to work out a credit score is called “logistic regression”. This method uses independent variables (i.e. your debts) to sort you into one of two categories: “good borrower” or “bad borrower”. If you have proven yourself able to take on debt and pay it back, the algorithm will likely consider you a “good borrower”. On the other hand, if you’ve ever defaulted on loans or missed credit card payments, the algorithm will likely consider you a “bad borrower”.
In the United Kingdom, lenders have internal credit scoring systems that use their own criteria and algorithms. These are separate from the public scores that you can get from a credit reference agency like Equifax. However, this does not mean that the public credit scores are simply made up. They give you a good idea of what lenders are thinking when they look at your credit history.
Why your credit score matters
Your credit score tells your lender how likely you are to be able to pay off a loan. When it comes to a mortgage, this is important. We’ve discussed before on this blog why lenders are so cautious when it comes to mortgages. Mortgages have always been tricky to get approved. However, in recent years, lenders have been far more fidgety about it.
One of the major causes of the 2008 financial crisis was the subprime mortgage crisis that unfolded from 2005-2007. To put it simply: Lenders in the United States had been giving out mortgages to people who wouldn’t be able to pay them off. This, in turn, drove up house prices due to speculation and other factors. Then, the mortgage rates rose, and many borrowers found themselves suddenly unable to repay. The result, when many of the borrowers defaulted on their loans, was catastrophic. The devastating impact on the global economy cratered rates of growth for many years.
House prices collapsed, causing many homeowners to enter negative equity, which meant they had more to pay off on their mortgages than their houses were actually worth. This led to a reluctance to sell. The housing market slumped, and with it went credit and the stock market. This, along with several other factors, caused a global recession. It was a complete disaster, and caused the collapse, or near-collapse, of many financial institutions.
Naturally, lenders want to avoid a situation like that ever happening again, so they’re much, much more careful about who they lend to. This means that they’re particularly careful to scrutinise your credit, because they want to be sure you’ll be able to make repayments. What’s more, giving out mortgages too readily encourages runaway speculation. The lenders have to appear cautious, so as to avoid rocking the boat too much.
This doesn’t mean that it is impossible for you to get approval, of course. But it does mean that it can be difficult. If a lender cannot be absolutely sure that you’re a trustworthy borrower, they will not lend to you.
How Credibble can help improve your credit score
Credibble’s unique system not only tells you your credit score, but also the factors that go into your credit score. It breaks your credit score down into a set of digestible modules. This way, you can see point-for-point where you can make improvements.
Credibble tracks up to 50 different factors in your financial history and awards you a “point” for each positive change you make or maintain. This feedback helps disentangle the complicated analysis that goes into your credit score, and improves your chances of mortgage approval.
If you sign up for Credibble today, you’ll immediately be shown your current credit situation, and the system will tell you exactly what you need to do to start making improvements. It may suggest that you move on to a mobile phone contract plan, rather than pay-as-you-go. It may suggest looking into credit cards and borrowing sensible short-term credit on certain purchases. Or it may suggest that you avoid overusing your overdraft.
Whatever it may be, there’s bound to be some changes you can make to start building a good reputation. You could be creditworthy in as little as a few months.
What moves can I make to start improving my credit right now?
To improve your credit right now, here’s some things you can do right away:
- Get on the electoral register! It’s free, and it helps lenders verify your identity. Bear in mind that you don’t have to be on the open register to count. So, if you’d rather not have your name available to any company that wants it, you don’t have to. Just register to vote! You will need your name, address and full National Insurance number to hand.
- Check that your financial history isn’t tied up with that of somebody else. This is particularly true if you are no longer in a relationship. If that person makes worse financial decisions than you, it could damage your own reputation. It’s always worth making sure that your friends’ mistakes don’t become your mistakes in the eyes of lenders!
For more ideas on how you can improve your credit score today, check out this blog from last year.