If you indulged in a credit binge during the boom you will probably need to get your affairs in order, writes FIONA REDDAN.It's particularly important if you plan to take out a mortgageor borrow money to buy a car any time soon. Here are 10 steps that will put you in a better position to borrow again
GET YOUR CURRENT ACCOUNT IN ORDER
Your current account offers a wealth of useful information on which a bank can base its lending decisions, so don’t give them any excuse to turn you down. For example, if you are a couple of days late with a loan repayment, the information won’t be sent to the ICB but it might show up on your current account as a referral fee. “If you have even one referral fee in the past six months, it’s almost a straight no,” says Derek Maguire, financial advisor with Financial Architects. And don’t think that by going to another lending institution you will avoid inspection of your current account. The first question another lender will ask is, “Why don’t you go to your own bank?”.
PAY DOWN YOUR NEGATIVE EQUITY
If you are stuck with an underwater mortgage, you will find it very difficult to borrow more. For those who plan on moving in the coming years, instead of waiting for the market to rise again, a smart idea – if you can afford it – is to overpay your mortgage each month. In this way, you could cut your debt and improve your borrowing chances.
You should also be aware that if you do run into difficulties repaying your mortgage and manage to strike a deal with your mortgage provider to write-off some of the loan, it will have a major impact. “Your credit rating is shot for six years,” says financial advisor John Lowe.
CUT UP THE CREDIT CARDS
If you have a wallet full of credit cards, it’s time to take out the scissors. Banks may ask you for 12 months of credit card statements, and it will be very important that you are not in arrears with your repayments. Similarly, any outstanding debt will need to be cleared. If you have credit card debt, the lender is likely to insist that you deal with it before you get a loan.
CHECK YOUR CREDIT REPORT
You can obtain your credit report from the ICB for a fee of €6, which will detail your Credit Bureau Score (CBS). While you may believe that you have a perfect rating, mistakes can happen, so be sure that the report is an accurate representation of your affairs with financial institutions. And, with identity fraud on the rise, it’s best to find out sooner rather than later that someone has taken out a car loan in your name.
DONT LEAVE A TRAIL OF ERRANT SPENDING
With banks now cherry-picking only the best customers, too much evidence of exactly how you spend your money can work against you. According to Karl Deeter of Irish Mortgage Brokers, banks are increasingly applying “soft underwriting” tactics to select the best borrowing candidates. This means that regular late night ATM withdrawals on Grafton St, or frequent €10 spends on your Laser card in the local off-licence, can limit your appeal. “You want the bank to have no doubt about how prudent you are with cash,” he advises. To leave no trace of your spending habits, consider withdrawing your weekly budget in cash – and sticking to it.
DON’T MISS A LOAN REPAYMENT
If you are late by more than 30 days with a loan repayment, your lender will automatically forward the information to the Irish Credit Bureau (ICB) and your credit score will be negatively impacted for five years. This is the case if you don’t have the money to make the payment or if it’s for a more innocuous reason such as forgetting to set up a direct debit. According to Derek Maguire, financial advisor with Financial Architects, for every 10 people who switch bank accounts, one will get caught out in this manner.
Whatever the reason, a late payment is a late payment. To counteract its impact, Maguire recommends that you keep a record of your accounts, to show evidence to a potential lender that the late payment was due to a technical error, rather than a lack of funds.
PAY DOWN YOUR CAR LOAN
Rather than basing how much you can borrow for a mortgage on a multiple of your income, many banks now assess it on an affordability basis. As financial advisor John Lowe points out, banks want to see that all your financial commitments, including your mortgage and any outstanding loans, account for just 35 per cent of your net income. So, while you may have a monthly after-tax income of €4,000, if €1,000 goes on servicing loans other than your mortgage each month, this can severely hinder your borrowing capacity.
MAKE REGULAR PAYMENTS TO THE BANK OF MAM AND DAD
If you’re saving to buy your own home and living with your parents while doing so, it’s time to formalise the arrangement. After all, contributing in an ad-hoc manner to the family budget depending on how busy your social life was that week will not impress the banks. “The biggest reason people can’t get credit at the moment is their capacity to repay,” says financial advisor Derek Maguire, adding that banks will look for applicants to show that they will be able to make repayments of a similar amount to a mortgage. That means proof of regular savings or rent payments.
CANCEL THAT ONLINE GAMBLING ACCOUNT
If you like the occasional flutter on the gee-gees, or more frequently put bets on the Premiership, it may be time to cancel your online gambling account and take a trip to your nearest betting shop instead. While it may not be included in a bank’s formal lending policy, in the current climate banks will not look on gambling habits kindly, on the grounds that it can affect an individual’s ability to repay a loan.
PAY OFF THAT GAS BILL
Banks used to ask for copies of utility bills as proof of residence, but now they are checking them to make sure you are keeping up with repayments. As Derek Maguire, financial advisor with Financial Architects says, if one of your utility accounts is in arrears, it will be “a straight no” from the bank.
