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

Paloma Kubiak
Written By:
Paloma Kubiak

What a tough time to be a first-time buyer. The cost-of-living crisis and high inflation are biting, which could leave buyers with a less than ideal credit rating just when they need one that’s robust.

Loss of income, gaps in employment, increased household costs and rising interest rates on different forms of credit have made it even harder to achieve the dream of home ownership.

However, while it may seem like it’s all doom and gloom, there are numerous things prospective buyers can do to improve their credit score and increase their chances of being approved for a mortgage.

The economic backdrop

With finances stretched and many people feeling the financial aftershocks from the pandemic, we have seen people forced to turn to other means in order to pay bills and keep afloat.

Our research shows that it’s fairly common for people to make use of their overdraft (33%) and to be in a certain amount of credit card debt (25%). While this can be part of the normal ebb and flow of household finances, if not managed correctly it can have long-term consequences, impacting your credit score and in turn your homebuying chances.

That’s especially true right now, when interest rates for repayment are continuing to creep up across many forms of credit. Riskier options like payday loans also rise in popularity during times of financial difficulty and can lead to borrowing spiralling out of control. We’ve seen 14% of prospective first-time buyers’ credit scores worsen since the pandemic; nearly a third (30%) are worried about how this will impact their homebuying chances.

Improving your credit score may be simpler than you thought

If your credit score has felt the effects of both the pandemic and cost-of-living crisis, there are several ways you can seek to improve your rating. It’s worth noting there are three main credit reference agencies which different organisations use to source their information, and each has its own scoring systems. This means 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 result in a negative impact on their credit score.

Therefore, it’s important to thoroughly check your credit reports and an overview of your financial score. Always make sure to correct any wrong information which may be holding you back.

Simple ways to improve your score include:

  • Register on the electoral roll and make sure you 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 mindful to keep your spending between 20-30% of your credit limit to avoid adversely impacting your score. Additionally, it’s worth looking at paying your balance in full every month to further boost your score.
  • Avoid applying for credit you might be turned down for by using eligibility calculators; if it looks like you have a low chance of being approved, don’t take the risk and move on to a better alternative. Also, ensure you don’t make multiple applications in a short time if you’re ever denied.
  • Make sure you keep an eye on your financial housekeeping – regularly check your score, pay your bills on time and bring down your borrowing where possible. When combined together, these all have a significant impact.

According to our research, 40% of prospective buyers are already taking measures to improve their credit rating with over half (56%) always paying bills on time. A third (34%) have paid off debts and registered on the electoral roll (32%).

For prospective first-time buyers, it may seem bleak right now but there are many ways you can start to improve your score.

The sooner you begin to take these steps before making a mortgage application, the better position you’ll be in when the time comes around to getting on the property ladder.

For those who’ve had gaps in employment, credit issues or lumpy incomes, you might not fit the cookie cutter mould of the mainstream lenders. And that’s okay.

At first it can be disheartening, but there are specialist lenders out there who are able to better understand your financial situation.

Jon Cooper is head of mortgage distribution at Aldermore