We think it is important to point out something that appears to be an urban myth in finance: you do not need to take out credit to have a good credit score.
Yes taking out credit and using it responsibly can improve your score, it doesn't mean it is a must. For many people, taking on credit in early adulthood is an innocent decision to "build credit" with an end goal of purchasing a house. It an often end up with a reliance on credit, high levels of debt and no one ever actually sits back and questions whether it is necessary.
We want to blow through many financial myths circulating in our society today and this is certainly a big one. We are sure you have heard someone say: "If you want a mortgage some day, you need to take out a credit card".
Let's take a step back a moment.
You want to one day buy a home, and you figure to need a mortgage to help you buy one.
Banks provide the mortgages. They make billions of pounds a year on the interest you pay for borrowing. They want to give mortgages, but understandably they don't like the high costs and missed profit when people stop paying their mortgage. So they assess us all, using computers and algorythms, to decide whether to lend to us or not.
Simply presenting yourself as a responsible candidate to be a borrower is all that you need to do. You don't HAVE to show that you have responsibly borrowed in the past.
ALSO, please understand that the myth of people needing to take out a credit card to be accepted for a mortgage works for banks - they make money from you having a credit card - they've no reason to say otherwise. It is in their financial interest for you to take out credit cards and get you hooked on debt from the start. Many want you to be responsibly-hooked.
So whilst it does improve your credit score to have a credit card and pay it back responsibly, you don't need one. Take your chance just presenting yourself as a responsible candidate for a mortgage instead.
Our top tips for improving your credit score to get a mortgage are:
- Stop applying for credit - hard searches on your report make you less attractive to lenders as it looks like you're hunting around for credit.
- Open up credit report account and check once a month to make sure it is correct. If there are any errors - get them corrected via Equifax. This includes making sure old dormant accounts are reflected as "closed".
- Be as consistent as you can with your details across your financial accounts - check your report and go through all your active accounts' addresses to make sure they are up to date.
- Keep credit utilisation low. Using more than 50% of your available credit can have a negative impact on your score. So if you are on a #debtfreejourney paying off debt is improving your score. Now don't be tempted to increase your credit limits to improve the utilisation percentage; that can back fire because...
- ...You should keep borrowing to a minimum. Showing a lender that you have lots of available credit can make them concerned for your affordability to take on a mortgage if you were to later utilise that available credit. So cancel and cut up unused cards.
- If you already have a credit card, never use it to withdraw cash from. It reflects badly on your score as lenders see it as bad money management.
- Join the electoral roll if you haven't already - and again make sure this address links up with the address on your financial accounts.
- Smash your debts with any savings you have - this reflects responsible money management and presents you as an attractive customer to a lender.
- Always pay your bills on time - missing bills like utility bills or old catalogue bills for £9 can negatively affect your score no matter how insignificant it may seem to you.
As always feel free to comment below or DM me on Instagram @financielle for questions on this post...