Your credit history tells a story – your financial story. Whether you’re dreaming of buying your first home or looking to remortgage, understanding how this story affects your mortgage chances is crucial. Let’s walk through everything you need to know about credit history and its impact on your mortgage journey.
Think of your payment history as your financial report card. Every time you miss a payment or pay late, it’s like getting a mark against your name. While a single late payment might seem minor, it’s like a small crack that can grow larger if not addressed.
When you’re more than 30 days late on a payment, lenders start taking notice. They use a simple but telling system to track how late payments are:
Each of these marks stays on your credit file like breadcrumbs, showing lenders where you’ve been. Mortgage lenders pay particular attention to your payment history from the last 12-24 months – it’s like your recent financial behavior carries more weight than ancient history.
Life doesn’t always go as planned. Sometimes, you might need to make special arrangements with your creditors – we call these “Arrangements to Pay” or A2P. Think of it as renegotiating the rules of the game when you’re struggling to play by the original ones.
These arrangements show up on your credit file with an “AR” marker. While it’s better than defaulting, it’s like raising a yellow flag to future lenders. They’ll want to know:
Some lenders are more understanding than others. Many will want to see that you’ve successfully completed your arrangement and maintained good payment behavior for 1-2 years before considering you for a mortgage.
A default is like a red mark on your credit file – it happens when a lender decides to close your account due to missed payments. Think of it as them saying, “We’ve given up on this working out.”
Before this happens, you’ll receive a “Notice of Default” – consider this your final warning. Once a default is registered, it stays on your credit file for six years, like a financial scar that slowly fades but doesn’t completely disappear until that time is up.
The good news? Not all defaults are created equal. Some lenders might overlook:
A County Court Judgment (CCJ) is like the heavy artillery of credit problems. It happens when a creditor takes you to court over unpaid debts and wins. This is one of the most serious marks you can get on your credit file.
There’s a silver lining, though – if you pay the CCJ within 30 days (the “one month rule”), you can apply to have it removed from your record completely. Miss that window, and it stays for six years, whether you pay it or not.
Individual Voluntary Arrangements (IVAs) and bankruptcy are like pressing the nuclear button on your finances – they provide a fresh start, but the fallout lasts for years.
An IVA is a formal agreement lasting typically 5-6 years, where you agree to pay what you can afford. Think of it as a peace treaty between you and your creditors. While it’s better than bankruptcy, it’s still a serious step that affects your credit for at least six years.
Bankruptcy is the most serious option – it’s like declaring financial defeat. While it usually only lasts for a year, its effects echo much longer. Most lenders want to see at least 4-6 years pass after discharge before they’ll consider lending to you again.
Being on the electoral roll is like having a verified ID in the financial world. It proves who you are and where you live, making lenders more confident in dealing with you. Register as soon as you move to a new address – it’s one of the simplest ways to boost your creditworthiness.
Think of credit utilization like a gas tank – you don’t want to run too close to empty or too close to full. The sweet spot is using less than 30% of your available credit. Going above 50% starts raising eyebrows, and above 90% sets off alarm bells.
When you open joint accounts or take out shared loans, you create financial associations. It’s like linking your credit history with someone else’s – their financial behavior can affect your creditworthiness. Choose these associations carefully, and remember to break them (through financial disassociation) when relationships end.
If you’ve had credit problems, don’t lose hope. Time is your ally – most issues become less significant as they age, and after six years, many disappear completely. Focus on:
Remember, different lenders have different appetites for risk. Specialist lenders might be more understanding of past problems, though they typically charge higher interest rates and require larger deposits.
Your credit history is important, but it’s not set in stone. Every payment you make on time, every debt you settle, and every year that passes without new problems helps build a stronger financial foundation. Whether you’re recovering from past issues or building your credit for the first time, understanding how the system works is your first step toward success.
Remember, this guide is just that – a guide. For personalized advice about your situation, always consult with qualified financial advisors who can look at your specific circumstances and help you chart the best path forward.
Note: This information is accurate as of November 2024. Credit criteria and lending policies can change, so always verify current information with lenders or professional advisors.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
Author:
Founder and mortgage and protection adviser in Albion Financial Advice
Dariusz Karpowicz is a seasoned adviser in the financial services industry. After gaining valuable experience working with an established broker, he founded his own practice, Albion Financial Advice. This firm is dedicated to assisting clients in acquiring properties and advising on various mortgage options. Born and raised in Gdańsk, Poland, Dariusz moved to the United Kingdom in 2006.
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