BLOG: Improving your credit score as a first-time buyer

What a tough time to be a first time buyer. The cost of living crisis and high inflation are raging, which could leave buyers with a less than ideal credit score just when they need a solid one.

Loss of income, job gaps, increased household spending and rising interest rates on various forms of credit have made it even more difficult to achieve the dream of home ownership.

However, while all of this may seem like a disaster, there are many things potential buyers can do to improve their credit score and increase their chances of being approved for a mortgage.

The economic context

With finances strained and many people feeling the financial repercussions of the pandemic, we have seen people forced to turn to other means to pay their bills and stay afloat.

Our research shows that it’s quite common for people to use their overdraft (33%) and have some amount of credit card debt (25%). While this can be part of the normal ebb and flow of household finances, if not handled properly it can have long term consequences, impacting your credit score and therefore your chances of buying. a house.

That’s especially true right now, as repayment interest rates continue to rise across many forms of credit. Riskier options like payday loans also gain popularity in times of financial hardship and can lead to spiraling borrowing. We’ve seen 14% of potential first-time buyers’ credit scores deteriorate since the pandemic; almost a third (30%) are worried about the impact this will have on their chances of buying a home.

Improving your credit score may be easier than you thought

If your credit rating has felt the effects of both the pandemic and the cost of living crisis, there are several ways you can look to improve your rating. It should be noted that there are three main credit reference agencies that different organizations use to obtain their information, and each has its own rating systems. This means that your credit score may differ between these agencies.

Even Buy Now Pay Later purchases have started being reported to credit reference agencies, meaning anyone who pays late or misses a payment can negatively impact their credit rating.

Therefore, it is important to carefully check your credit reports and overview your financial score. Always be sure to correct any misinformation that may be holding you back.

Here are some easy ways to improve your score:

  • Register on the electoral lists and make sure to keep your address up to date.
  • Apply for a credit card so you can start building your repayment history; this will help reassure lenders of your financial discipline – but be sure to keep your spending within 20-30% of your credit limit to avoid negatively impacting your score. Plus, it’s worth considering paying off your balance in full each month to further boost your score.
  • Avoid applying for credit that you may be denied by using eligibility calculators; if it looks like you’re unlikely to be approved, don’t take the risk and move on to a better alternative. Also, make sure you don’t make multiple requests in a short time if you’re ever denied.
  • Be sure to keep an eye on your financial management – check your score regularly, pay your bills on time and reduce your borrowings where possible. When combined, they all have a significant impact.

According to our research, 40% of potential buyers are already taking steps to improve their credit rating and more than half (56%) always pay their bills on time. A third (34%) repaid their debts and registered to vote (32%).

For potential first-time buyers, it may seem gloomy right now, but there are plenty of ways to start improving your score.

The sooner you start taking these steps before applying for a mortgage, the better off you’ll be when the time comes to get on the homeownership ladder.

For those who have had job gaps, credit issues, or lump sum incomes, you might not fit the cookie-cutter mold of traditional lenders. And it doesn’t matter.

At first it can be daunting, but there are specialist lenders who can better understand your financial situation.

Jon Cooper is Head of Mortgage Distribution at Aldermore