Credit Rating

When you apply for a mortgage, the mortgage lender decides whether or not they wish to accept your application and what level of interest they should charge, based on your income and personal circumstances. These circumstances include your credit history. Your credit history is detailed in a credit report, which is maintained and updated by a credit reference agency. There are three credit reference agencies in the UK:

Credit reference agencies hold information on most UK adults, such as their registered addresses, registration on the Electoral Roll, any County Court Judgements (CCJs), bankruptcies and insolvencies, as well as any credit card, loan or previous mortgage applications. If you apply for a mortgage or a personal loan, the lender will check your credit report and put a mark on your file. This mark stays on your report for up to two years, depending on which credit reference agency holds your information.

Each time you take out a credit card, loan, or any other form of credit - a mobile phone contract for example - information about your payments, if they were made on time and in full, is recorded on your credit report. Paying your mortgage repayments on time will improve your credit rating, as it shows future lenders that you are 'low risk'; there is little chance of them losing money because you always repay money you owe.

An improved credit rating means that you are more likely to be accepted for loans, mortgages and credit cards in the future. Importantly, it also determines how much you are allowed to borrow, since lenders will consider you less risky and are thus more likely to offer you a larger loan amount. If you have made late repayments or missed payments on a personal loan, or only made minimum credit card payments for a long period of time, you may find your credit rating is lower, and thus lenders do not offer you their best mortgage deal, or may refuse your application altogether.

Similarly, if you have never had any form of credit, you may find that lenders refuse your mortgage application. This is because mortgage providers have no credit history on which to base their lending decision: as a result they will consider you to be high risk.

Before you apply for a mortgage, you may wish to obtain a copy of your credit report. This gives you the opportunity to check it for accuracy and will help you consider which mortgage deals to apply for. Having the wrong address, incorrect dates between which you lived at certain addresses, or out-of-date debts on your credit report will affect your ability to obtain a mortgage.

If you have a poor credit history, you should consider the possibility that a poor credit mortgage is your only option, since mortgage lenders consider you too high risk for their standard mortgage deals. You can obtain a copy of your credit report for a small fee, by contacting one or more of the three credit reference agencies above.

Your National Credit Score can give you an accurate indication of your credit rating based on the information contained within your Experian credit report. It is a number between zero and one thousand: the higher the number, the better your credit rating, and the easier you should find it to obtain a mortgage. You can obtain your National Credit Score for a small fee by using Experian's online service www.creditexpert.co.uk .

Even if your credit score is low and you are refused a mortgage with one lender, you may still be accepted by another. Each mortgage provider has a different way of calculating the risk of lending you money, and some specialise in accepting applications from those with poor credit ratings. Specialist mortgage brokers may be able to find you a mortgage with an interest rate and repayment amount that best suits your needs.