Boost Your Credit Ratings
Show You Are a Good Risk
If you are looking to buy a house in the next few years then you need to boost your credit rating, or no bank will even look at you.
After their almighty misjudgements and plain stupidity pre-2008 every bank is now extremely averse to risk. There has always been a banking rule that higher risks meant higher interest rates, but nowadays banks are only interested in the lowest risk customers.
Today’s banks will only lend to people who are almost certain to be able to repay the loan. In the days of appreciating property prices banks knew that they could recoup their money by repossessing and selling the house if necessary.
95% Mortgages? Dream On
Gone are the days of 100%, or 95% mortgages. Prices are not going up by 10% a year that they used to be, so the banks need to be certain that the value of the house will cover the amount you owe if they do need to repossess.
The maximum you will be able to borrow is 90% of the house’s value. If you can cut that to 85% you will be offered a lower interest rate because the bank’s money is not at so much risk.
Reducing Your Credit Risk
Your credit rating is used to measure how risky you are as a loan prospect. You need to work hard to boost your credit rating for five years before you even apply for a mortgage.
If you have a job, keep it and avoid changing jobs except through necessity. If you are self-employed then you will need a business plan and audited accounts for five years showing a steady income growth.
If you don’t have a job then you need to start earning money somehow. Start writing articles like this one and you will soon have a full-time income. Start a work from home gardening or beauty business and work at it. Anything is better than being unemployed and surviving on benefits.
- Bank Loans
Like credit cards a bank loan is essential if you want to demonstrate what a good risk you are. Even if you are a sensible saver who always pays cash for everything you have to go against your principles and apply for a bank loan.
Build up your savings in a savings account at your bank until you have £500. (Keep making payments into that savings account even after you get the loan.) Apply for a £500 loan over 12 months. Your bank will happily lend you the money because you are a good risk, having proved that you can save regularly. There may be a condition attached to your loan that you maintain your savings account at its current level.
You need to explain to the bank that you want to keep growing your savings, but that you need a new computer for your job. The bank will lend you the money because they will make money by doing so. They will make no attempt at all to persuade you to use your savings, even though that would make more sense if you were not trying to boost your credit rating.
Even though you could repay the loan instantly you must keep it up for the full term of the loan.
When that loan is paid off, you then need to take out a larger loan over a two or three year period.
- Credit Cards
Even if you prefer cash you must get a credit card and pay off the balance in full every month. If this is against your better judgement just grin and bear it. Yes, it is better to pay everything with cash but that leaves no paper trail. You have to have evidence that you can handle debt so you must have one credit card.
You need to pay your credit card bill in full every month, so interest free credit cards are of no benefit to you. Look for a card that has a cash-back facility or one that earns you loyalty points of some kind that you can use.
5 Years Down the Line
After five years of paying off your credit card bill every month (set up a direct debit to repay the full amount), paying utility bills on time and repaying bank loans you never needed you are ready to apply for a mortgage because your credit score now shows you are a good risk.