Since purchasing our first home back at the start of 2014 we’ve always aimed to have it paid off as soon as possible. With interest rates at an all time low and the stock markets recovering nicely; some have started to question the value of over-paying a mortgage instead of investing to be ‘mortgage neutral’. Aside from the obvious psychological benefit of being mortgage free at a quicker date, one of the main reasons why I’ve tended to focus on overpaying the mortgage is because I knew we could access better rates with lower LTVs.

Saving up for a house deposit was tough, and like many young people, we had to do so whilst renting at the same time. Because of this, we decided to purchase with a relatively low deposit of 10%. The main reasoning for this was that more would have been lost due to rent than costing us in interest from a poor mortgage rate. Despite this; our mortgage rate remains high and so I’m keen to get to a better LTV by the time out fixed term comes to an end.

With the recent government strengthening of lending criteria, it’s never been more important to ensure your credit score is as good as you can achieve before trying to secure a decent rate. I was recently sent this article and thought it particularly relevant given that we will soon begin planning for our first remortgage. Have a read through and let me know if you’ve taken any steps specifically to improve your credit score. Or have you encountered any problems because of a low score?

Building or Repairing Your Credit Score in a Post-Recession UK

To put it mildly, these are not the best of times for an individual or small business to be trying to get the credit you want or need. Even though many banks are beginning to show good profits again after struggling through a near-decade of financial crisis, their fingers are probably still burning from the drubbing they took beginning in 2007, and they’re not overly anxious to go down the same path again. As a result, the banking industry as a whole is playing it safe, and extending credit to only those loan applicants that seem most likely to repay the loans, on time and in full.

Selecting Lending Practises

In all honesty, one would be hard-pressed to blame them for being more selective in their lending practices, despite the fact that a significant portion of their losses were the result of their own risky practices in the past. And while banks haven’t wholly abandoned those risky practices, they have become much more circumspect in their decisions regarding to whom they will extend credit, at least where individuals and small businesses are concerned. To make matters even worse for the borrower, the banks that advertise attractive interest rates on loans pretty well limit those interest rate bargains to borrowers with exemplary credit scores; in short, to people who could probably get along just fine without the loans. If your credit history has even minor questionable entries, such as a late payment or two, the interest rate you’re offered will bear little resemblance to those listed in the lender’s adverts.

So how do you go about getting some of that elusive credit? A good start would be to approach it in the same way as people who don’t need it. Here are a few simple, proactive tips to help get you on your way, and the first might be the hardest of all.

Keep a solid chequing account. If you don’t have a chequing account, you’ll need to open one as soon as possible, because that is the first thing a lender is going to look at. You’ll need to keep a reasonable balance in the account, preferably sufficient to cover the payments on your loan after all other expenses have been deducted. If you can’t manage this much, you really should ask yourself if you will be able to handle the payments on the loan. Don’t count on an overdraft privilege to make up for shortfalls. As a matter of fact, you’ll be better served by not utilising overdraft privileges at all, even if they are offered at no charge, since using the overdraft is a clear statement that you don’t have enough money, even before taking out the loan.

Clear Up Your Credit Obligations

Clear up any old credit obligations. Naturally, if you have a loan hanging over your head already, the lender is going to be wary about lending you more money. Keep in mind, however, that your existing loan payments aren’t all your banker will be looking at. Old loans that have been written off for nonpayment are credit score poison, so you will want to make certain you have no old, outstanding debts. The same applies to any other people’s obligations on which you are a co-lender or guarantor. If you’ve put yourself as co-signor on someone else’s loan, the other person’s loan will be viewed by the bank as being your responsibility.

For the purpose of evaluating your credit-worthiness, the banker will assume the worst-case scenario will come to pass.

Convince the bank that you don’t really need a loan. This is actually easier to do than it might at first seem. Keeping a positive balance in your account is a good start. Beyond keeping your account(s) in a healthy condition, banks tend look favourably upon customers who handle recurring bills with direct debits. You can set up predictable payments such as utility bills, or even your mortgage payment to be deducted from your account automatically. By doing so, you make a statement that you are certain of your ability and intent to pay, which is your banker’s primary concern. Just be certain that you have enough money in the account to make the payment every month. As noted before, relying on overdraft privileges to cover these automatic debits will not be particularly reassuring to your banker.

There are, of course, many other things you can do to improve your chances of getting a loan, just as there many different reasons for taking out a loan. If you are proactive and conscientious in handling your finances, you will greatly improve your creditworthiness in the eyes of prospective lenders. Get to know what they look for in an ideal customer, and do what you can to demonstrate that you fall within that group. Not only will doing so make it easier for you to borrow the money you need, it can actually save you a considerable amount in fees and interest charges.