Your credit file reflects your current financial status and creditworthiness. That’s why having bad credit signals to potential lenders that they should rethink financing your mortgage for fear you might fail to meet the monthly mortgage payments.
However, not all bad credit is created equal. Minor credit issues such as a single missed payment will not affect your mortgage applications – lenders are human too and understand that people make little mistakes! But, if it’s something more serious like missed payments for an outstanding loan – especially if it’s a secured loan – you may have greater difficulty when applying for a mortgage.
With that in mind, you should know what the most common causes of bad credit are so you can remedy them on your credit record, further boosting your chances of successfully getting a mortgage and owning your dream home.
County Court Judgement (CCJ)
A County Court Judgement (CCJ) is a court order registered against a debtor after several failed attempts by the lender to reach a repayment agreement. Future lenders look at this as evidence of an unwillingness to repay one’s debt.
If the outstanding debt is paid within one month of issue, a CCJ is removed from your credit file via a certificate of cancellation, otherwise, CCJs will remain for 6 years.
That said, many bad credit mortgage lenders view settled CCJs older than 3 years as history. If other factors on your file are satisfactory, an old CCJ won’t stand in your way of home ownership.
A default occurs when you fail to pay back a loan for 3–6 consecutive months on an open credit account. The lender will classify you as a debtor instead of a regular customer and may choose to close the account with a negative balance.
Defaults on your credit file signal financial difficulty to potential lenders, especially if the incident is recent or not completely settled. That’s why the older the default is, the less it’s likely to affect a lender’s decision to approve your mortgage.
Late payments are some of the less-serious causes of bad credit, especially if they’re few and happened as a result of human error and not financial struggle. Unfortunately, you might find out about late payments after a mortgage application is declined, but you shouldn’t fret over it too much.
Lenders consider late payments a problem if the incidents are both recent and recurrent as this can take away from your credit score. It’s also much more serious if your late payments are for a mortgage than if they’re for a parking ticket. That said, lenders should understand if only a single late payment took place in the last 12 months with no precedent.
Low Credit Score
A low credit score can be a source of confusion if you don’t know how it came about. Understandably, you might try to dispute it, but some minor factors can affect your credit score adversely even when you don’t realise it.
Low credit can happen if you fail to register on the electoral roll, which could be mistaken for an attempt to hide your whereabouts. Moreover, if you move to a new home and forget to reroute your bills, you might face a few late payments that can show up on your credit file.
Never using a credit card can also harm your credit, so getting one, using it, and repaying it on time can give your score a boost.