What is Bad Credit? How does adverse credit history impact your mortgage options?
In the world of personal finance, your credit score plays a pivotal role in determining your eligibility for loans, credit cards, and mortgages. But what happens when your credit score is less than ideal? In this article, we’ll explore what bad credit is, how it’s measured, and the impact it can have on your mortgage application.
Know Your Score
If you aren’t sure what your credit score is and what adverse credit you have on your file the first thing to do is get a report from CheckMyFile.com.
We usually recommend clients to run off a PDF report from checkmyfile.com they offer a 30-day free trial, then £14.99 a month – you can cancel online at any time. The report allows you to run off a very detailed report from Experian, Equifax and TransUnion.
What Is Bad Credit?
Bad credit refers to a low credit score, typically caused by past financial behaviors such as missed payments, defaulting on loans, or high credit utilisation. Lenders use your credit score to assess your reliability as a borrower. A low score suggests a higher risk, which can make securing loans more difficult.
Credit scores in the UK are generally measured on a scale by three main credit reference agencies: Experian, Equifax, and TransUnion. While each agency uses its own scoring system, a credit score below 580 (Experian), 380 (Equifax), or 565 (TransUnion) is often considered poor.
Common Causes of Bad Credit
Missed or Late Payments: Failing to pay bills on time is one of the biggest contributors to a low credit score.
Defaults: If you’ve defaulted on a loan or credit agreement, this will negatively impact your score.
Bankruptcy or CCJs: Filing for bankruptcy or having a County Court Judgment (CCJ) issued against you will significantly lower your score.
High Credit Utilisation: Using a large percentage of your available credit limit can indicate financial strain.
Too Many Credit Applications: Frequent applications for credit can make you look desperate for funds, reducing your score.
How Does Bad Credit Affect Your Mortgage Application?
Bad credit can make obtaining a mortgage more challenging, but it doesn’t make it impossible. Here are some ways it can impact your application:
1. Higher Interest Rates
Lenders view applicants with bad credit as higher risk, which means they’re likely to charge higher interest rates to offset that risk. Over the term of a mortgage, this can significantly increase the total cost of borrowing.
2. Lower Loan-to-Value (LTV) Ratios
With bad credit, lenders may offer you a mortgage with a lower LTV ratio. This means you’ll need a larger deposit, often upwards of 10-20%.
3. Fewer Mortgage Options
Not all lenders are willing to work with borrowers who have bad credit. You may need to look for specialist lenders who cater to those with poor credit histories.
4. Additional Scrutiny
Lenders will likely examine your financial history more closely if you have bad credit. They may require additional documentation or explanations for any past financial difficulties.
Steps to Improve Your Credit Before Applying for a Mortgage
- Check Your Credit Report: Obtain your credit report from checkmyfile.com to identify any errors or areas for improvement.
- Pay Bills on Time: Consistently paying your bills on time is one of the most effective ways to improve your credit score.
- Reduce Debt: Lowering your overall debt can improve your credit utilisation ratio.
- Avoid New Credit Applications: Minimise new applications for credit to avoid further reducing your score.
- Consider a Credit Builder Card: Using a credit builder card responsibly can help improve your score over time.
Can You Get a Mortgage with Bad Credit?
Yes, you can still get a mortgage with bad credit, but you may need to explore alternative options such as:
Specialist Lenders: These lenders specialise in offering mortgages to people with poor credit histories.
Guarantor Mortgages: A guarantor mortgage involves a family member or friend agreeing to cover your payments if you default.
How Mortgage Links Can Help
Bad credit doesn’t have to be the end of your homeownership dreams. By understanding what bad credit is, how it affects your mortgage application and the steps you can take to improve your financial standing, you can work towards securing the mortgage you need. At Mortgage Links, we specialise in helping clients navigate challenging credit situations to find the right mortgage solution for their needs.
Contact us today to learn how we can help you achieve your homeownership goals, even with bad credit.
