You are right to start thinking about your creditworthiness at this early stage.
First-time buyers need to prove to mortgage lenders that they are reliable borrowers, but that’s difficult if you’ve never had a credit history. Many young people think (rightly) that getting into unnecessary debt is a bad idea, but there is no bypassing our credit rating system which acts as the gatekeeper for so many major financial products and how much lenders depend on it. There is still a very narrow focus on your credit history and arguably rather strange, out of date indicators of how “sedentary” you are.
Covid-19 has resulted in a significant increase in rejected young borrowers. According to the Aldermore Bank First-Time Buyer Index, only one in five first-time buyers was able to take out a mortgage on the first try. This is less than last year, when around half of borrowers said they were approved for the first time.
Many of these problems can be avoided at a time when you are applying for a mortgage by understanding how the lenders work. For example, your lender will only lend you a certain multiple of your income. Using a trusted broker can often help you avoid the pitfalls and tick the right boxes.
Paying all your bills on time, getting on the electoral roll, and regularly monitoring your creditworthiness to make sure it is free from errors are all easy wins
But before that point, there is a huge amount that you can do to improve your credit score. First, you nail the basics. Paying all your bills on time, getting on the electoral roll, and regularly monitoring your creditworthiness to make sure it is free from errors are all easy wins. Also, do not open multiple credit accounts as this can affect your score. Keep your borrowing on one or two current credit cards max. If you switch from one to the other, be sure to close the previous one.
If you have an overdraft, you should pay it off as soon as possible. This is especially important if you have a free student overdraft. You may now have a graduate account that continues to offer an interest-free overdraft facility. However, this is reduced over the next year or two before being converted into a very expensive standard overdraft (typical rates are 40%). Make sure you have a repayment plan in place so you can reduce the overdraft before the fees are incurred. This alone will work wonders for your credit score.
Make sure you have an overdraft repayment plan so you can reduce the overdraft before the fees are incurred.
Otherwise, stick to a low balance on your credit card – no more than 10% of your total credit limit – and ideally pay off the balance in full each month for extra Brownie Points.
Never spend money on your credit card that you are not sure you can pay back in full. So budget like a boss so as not to lose track of your expenses.
It’s tempting to treat your credit card like a debit card, just one that never seems to run out of credit! But this is a surefire recipe for spending too much, borrowing too much, and basically becoming a financial mess. One idea is to only use your credit card for certain types of “simple” purchases that you have a budget for – e.g. B. for food. Keep saving in short-term amounts beyond your emergency pot so that you don’t get into the habit of writing “funny” things on your credit card. When you have savings goals, your spending will be more targeted – and you’ll get even more enjoyment when you know you’ve already paid for them.
Remember, credit is not free money: the bill will come, so make sure you are ready for it. If you follow these guidelines you will be on your way to better credit in no time!