Buy-now-pay-later lender Klarna has started sharing its customers’ repayment data with credit reference agencies, so lenders will now be able to see mortgage applicants’ history when reviewing an application.
This could have serious ramifications for those who are looking to apply for a mortgage and have late payments on their Klarna account.
Some other buy now pay later providers also provide credit agencies with this information.
While credit reference agencies need around 12 months to incorporate new data into individual’s credit scores, lenders will still have access to it.
Get ready: Experts recommend taking steps to improve your credit score at least six to nine months before making a mortgage application
Although borrowers are unlikely to see their buy now pay later history impacting their overall credit report just yet, lenders are known to put would-be borrowers’ finances under a microscope before they sign off a mortgage and will take a look at all the information available to them.
As well as this relatively new development, there are plenty of existing things which borrowers need to know if they want to show themselves in the best light when applying for a mortgage.
We outline five key steps to take ahead of buying your first home.
1. Get hold of your credit reports
James Jones, head of consumer affairs at credit company Experian, says there are plenty of things you can do to get your finances in the best possible condition before making an application.
First, get hold of your credit report from all three consumer credit references agencies in the UK, Equifax, Experian and TransUnion.
Lenders rely on different ones and so you want to be sure your profile with each is as good as possible.
Not only will this give you an overview of your financial score but also the opportunity to correct any wrong information such as address or full name, making it easier for lenders in the long run.
Jones says these types of errors should only take around two weeks to fix, but the earlier you can sort them the better. While your credit score isn’t everything, it is a significant factor in the success of an application.
Depending on when you are thinking of making a mortgage application you may have time to improve your credit score.
2. Register to vote
Jones’ second piece of advice is to make sure you are registered to vote. Most people only join the electoral register when they are prompted to ahead of a vote, but you can get in contact with your local council at any time to join.
Being on the register adds 50 points to your Experian credit score so it is worth doing if you haven’t already.
3. Get a credit card
Third, he advises to apply for a credit card. Though taking out credit in this way ahead of a loan request may seem counter-intuitive, building a strong repayment history will boost your credit score and reassure lenders of your financial discipline.
Just make sure you leave enough time to build up a track record, Jones warns.
‘Taking out a new card a month before you apply is a real no no,’ he says. ‘You don’t want to look like you are using credit to pay the deposit.
‘In the run up to applying to a mortgage you should be trying to leave your credit history alone.
‘But if you have got at least 6 to 9 months to apply, and you use the card sensibly then that can help rather than hinder your application and once it matures it can give your credit score a boost.’
Give yourself credit: Taking out credit can work in your favour. If you keep on top of your repayments having a record of borrowing is likely to improve your credit score
Everyone knows that maxing out your credit card is not a good approach, he continues, but he recommends keeping your balance to no more than 30 per cent of your card’s limit.
‘It’s not a cliff edge but it’s a good target to work towards. Having credit but not relying on it is a great message to a prospective lender’ he adds.
Akansha Nath, head of partnerships UK & Canada at Credit Karma, agrees that 30 per cent is the right credit card balance to hold, adding that using some credit every month and then paying it off on time shows you are good at managing your finances.
‘Likewise, using buy now pay later could help boost your credit score if you make sure you meet the deadlines for paying off. It is only if you fail to keep up with the repayments that it becomes an issue.’
4. Cut financial ties with ex-partners
Fourth, while we don’t like to think that our personal lives come into play too closely with our financial ones, many borrowers don’t realise that their credit score may still be linked to a former partner’s.
If you and your ex had a financial relationship, such as applying for a joint account or loan, even if unsuccessful, then your report may be linked to theirs.
If you had a financial relationship with an ex-partner, your credit histories could be linked
If you think this may be the case Jones suggests checking with agencies and then requesting a financial disassociation to make sure lenders don’t go through someone else’s file as well as yours when you apply for financing.
And if you still have a joint account then make sure this is managed into one name before making your application.
5. Keep on top of things
Fifth, is simply good financial housekeeping. Keep an eye on your credit score, which you can access free on credit agency websites. In the month or so before you apply, don’t run up any additional hard credit checks. And if possible bring down your existing levels of borrowing. Your ability to pay off debt will encourage lenders, while racking up additional credit may scare them.
While Help to Buy ends in March next year, with a final application deadline of 31st October time is running out for hopeful first time buyers to get their finances in order. However, Jones says Experian will always try and help customers take steps to improve their score even if time is limited.
‘If you are taking steps to improve your score than you will see improvements in the report we provide,’ he adds.
Best mortgage rates and how to find them
Mortgage rates have risen substantially as the Bank of England’s base rate has climbed rapidly.
If you are looking to buy your first home, move or remortgage, it’s important to get good independent mortgage advice from a broker who can help you find the best deal.
To help our readers find the best mortgage, This is Money has partnered with independent fee-free broker L&C.
Our mortgage calculator powered by L&C can let you filter deals to see which ones suit your home’s value and level of deposit.
You can also compare different mortgage fixed rate lengths, from two-year fixes, to five-year fixes and ten-year fixes, with monthly and total costs shown.
Use the tool at the link below to compare the best deals, factoring in both fees and rates. You can also start an application online in your own time and save it as you go along.
> Compare the best mortgage deals available now