How to improve your credit profile.

March 7, 2017

It is a common misconception that all debt is a bad thing. In reality not all debt is bad and knowing the difference between good and bad debt can actually help when applying for your mortgage!

So, what is Good Debt?

 

Basically any affordable debt that could be viewed as sensible, beneficial and for the long term good of the individual and that you can comfortably afford the repayments both now and in the future, then the chances are it is 'good debt'.

  • A Mortgage for your main residence as property historically appreciates in value.

  • Starting your own business. No business is started with an intention to fail and invariably they will make a better return than an initial investment.

  • Credit Cards and loans can help to build your credit profile

  • Student Loans. Paying for a University Education is seen by most lenders as an investment in an individual's future so again good debt!

  • Well conducted usage of an overdraft. By this we mean not exceeding overdraft limits and not spending more than a quarter of the month in "the red". This helps to evidence responsible usage of credit facilities.

  

Now we come to the thorny subject of what exactly is Bad Debt?

 

Essentially buying items on credit that have a very limited lifespan (clothes and consumables) that also have a negligible re-sale value, items that you cannot afford to pay for with cash so you use credit facilities. As long as you keep your repayments up to speed then you are OK, but invariably this type of spending will lead to problems further down the line.

  • Borrowing from Payday lenders: The interest rates on Payday loans tends to be astronomical to say the very least. This will then invariably cause undue pressure when it comes to meeting any other credit arrangement. Lenders will rarely accept their use.

  • Any missed or late payments on Credit Cards will be frowned upon by most lenders.

  • Any missed or late payments on personal loans will again be frowned on.

  • Missed or late payments on an existing mortgage agreement will cause major issues

  • Any defaults on loans or credit cards will probably bring about a decline from a mortgage lender.

  • A County Court Judgement will usually also result in a decline as will being in an Individual Voluntary Arrangement (IVA) or a Debt Management Plan (DMP)

  • A Bankruptcy or a property re-possession will almost guarantee a decline for at least 3 years with most lenders not being prepared to consider until 6 years clear.

So, the golden rule is live well within your means, if you haven't got the cash for it and it isn't vital that you buy it...DON'T!

Check your credit report regularly to make sure that you are keeping a 'clean sheet' with all your arrangements.

If your credit score is high, then you will stand more than a reasonable chance of being accepted for a mortgage.

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