First time buyers for either their own home or a buy to let investment who don’t have a credit history are in a very unique situation. While it’s great to go through life without worrying about debt, lenders don’t like the unknown. When they run a credit check on you, they want to see a history of responsible borrowing and timely repayments. If they can’t verify those things, they won’t have anything to assess your level of risk.
They’d view it as taking a chance – with the majority resisting the idea of leaving anything to chance so instead, they’ll choose the option of rejecting your application.
For those with no debt, the odds are stacked against you due to the way the finance sector works. It appears that the finance industry wants you to have debt, however, that’s only because when you do, they can then use your repayment history and your levels of debt to make educated assumptions on how you’ll manage future debts.
This isn’t a unique situation to those who have never had any debt. The only information held by the UK credit reference agencies are your UK associated finances. Not anything you’ve had overseas, so people moving to the UK will be starting from scratch, and those who have left and now returning will also have a low credit score.
Regardless whether you’re an expat returning, your first time moving to the UK or have just never had any debts, the same situation is recurring. People have either no credit history, a lack of it, or a limited amount of history with gaps for the time spent living overseas.
The main points you want to have covered before applying for credit are these:
- That you have a UK bank account
- That you have UK employment records, and wages being paid to a UK Current bank account. In the case of contractors, self-employed and CIS workers – regular deposits being made to your Current account.
- That the current bank account you use has Direct Debits being paid from it. The reason being, it’s at least a history of managing your bills.
- That you are registered on the Electoral Roll because it’s proof of British Citizenship. If for whatever reason you don’t or at some point haven’t met the requirements of being registered to vote, see this page here as you may be able to apply a Notice of Correction to your credit files to explain that you aren’t or weren’t eligible.
On that last point about the Electoral Roll, the records for Scotland, England and Wales are updated on the 1st December annually. Local councils canvas households in the few months leading up to December 1st to obtain up to date factual data. Check your credit report to find out what address you’re registered with and if that’s changed, use this page to update your details on your local council’s rolling register. Once you’ve done that, it will be faster to notify each of the three credit reference agencies (Experian, Equifax and CallCredit) to make them aware that your details have changed and request they update your credit files. They’ll access the rolling register details (updated monthly) to verify your information, and then update your credit file accordingly.
Building Credit to Obtain Mortgage Finance
It’s not necessary to pay interest rates in order to build a credit profile. There are credit builder credit cards available, which can be useful but also pricey. What won’t work in the UK is being added to your parent’s credit card (or anyone else’s) as an authorised user. There are credit building tips on the web that relate to the U.S.A but don’t apply to the UK. One of those being that you can build credit by being added to someone else’s credit card.
You can be an authorised user on someone else’s account in the UK. This will see you supplied with a credit card that’s linked to someone else. That’s only reported on the main credit card holder’s credit file and won’t count towards how you manage your credit. James Jones of Experian explains on uk.creditcards.com “it will have no impact on the secondary cardholder’s credit rating”. In other words, if you want to build credit using a credit card, it must be held in your own name to be linked to your credit files.
There are some people who will have surplus savings set aside, perhaps left through inheritance who use the savings for larger purchases, in which case, managing how you spend those savings is essential.
When building your credit, it’s important to keep things in proportion and keep the amount of debt below 45% of your total income. If you earn £20,000 per year, your maximum debt would be £9,000. You could easily max that out if you decide that instead of using savings to buy a new car, you get it through finance using someone else as a guarantor to access the finance arrangement.
Work with your monthly amount to determine how much you spend and apply the 45% debt to income ratio to it. If you earn on average £1,500 per month, total monthly debt repayments shouldn’t be exceeding £675 of that, regardless what savings you have.
Where this is important is if you decide that you’ll use a credit card to build your credit. If you wind up putting as much as possible on that, then your credit cards could report that you’re spending credit to the tune of over the amount you can afford to repay, even though it’s not technically credit. Paying an outstanding balance in full that’s above 45% of your household income towards a credit card can be indicative of money mismanagement, so be aware of that when you’re using a credit card to build a credit profile.
Keep your monthly payments manageable, but below 45% of what you earn. You never want a huge chunk of your wages going solely to paying a credit card balance down.
Money management for Mortgage Applications
Your current finances will be assessed to meet the affordability criteria. That’s why it’s imperative to monitor how much you’re putting onto a credit card.
Besides your credit report, the application process will require an assessment of your income. For that, you are going to need to show proof of income. For self-employed contractors, this can be difficult, so if at all possible, have regular deposits being put into your current bank account.
For salaried employment, it’s standard to be paid monthly or weekly so evidence of regular income is straightforward to prove. Ideally, have three to six months of deposits going into your bank account.
You will need at least a 6-month history for a credit check. This is the same for any creditor. Even to get a mobile phone contract, you’ll be credit-checked. It helps to have a guarantor for short-term finance agreements such as a mobile phone plan.
The idea is to get your name onto credit agreements to build a credit profile, but it doesn’t have to be credit. As long as you’ve got Direct Debits being debited from your current account and you’re named as the account holder for whatever the bill is for, be it with the gas company, broadband provider, or an insurance policy that’s paid by Direct Debit, the company can report to the credit reference agency that there’s no defaults, which shows you are managing your money and haven’t experienced a bounced Direct Debit due to insufficient funds.
You will need a credit history in the UK before you’ll be accepted for a mortgage. There aren’t any “no credit check” mortgage UK lenders. What there are, are mortgage lenders that don’t credit score because they’ll instead assess your application and credit history manually.
Having no credit can be just as bad as having a bad credit report indicating all sorts of defaults. The reason being there’s no information for lenders to assess your level of risk. At least with a bad credit history, there’s information there to show lenders they’d be taking a risk by approving a loan. Without any credit, there’s only the unknown and that’s something that can’t be reflected accurately with interest rates alone.
Credit reports show your credit history for the last six years. However, you don’t need six years of credit management to apply for a mortgage. At least three to six months of regular Direct Payments and credit accounts being managed properly will suffice with specialist lenders. That’s provided you’re in salaried employment and not self-employed. Mortgages for the self-employed will require more evidence of income. High street banks may want to see more of a history, but when it’s lacking, it may be that you need to work with an adverse credit mortgage lender.
This type of lender is mostly suitable to mortgage applicants with a history of mismanaged debts. The term also applies to those with unfavourable circumstances though so it is an option for those with a limited credit history causing them to have a low credit score.
You won’t get a guaranteed mortgage acceptance, as there are no guaranteed mortgages for bad credit. However, by choosing an adverse credit mortgage broker and explaining why you have limited or no credit history, they can advise on how to proceed with a mortgage application.
You won’t get a mortgage approved with no credit history. Therefore, what you need to do is build a credit profile. The more you have isn’t always better as it depends on where you put your credit. If you put too much of your living expenses onto a credit builder credit card, it can indicate that you’re spending beyond your means – if that amount is higher than 45% of your income.
That part is important to remember when you’re figuring out how to get a mortgage with bad credit but good income, because living debt-free is good, until it comes around to arranging finance. Then it can see interest rates spike beyond what you should be paying, just because of a lack of information for creditors to assess your level of risk.