Does hire purchase increase creditworthiness?

For reasons that have not been fully explained, many people believe that buying products on hire purchase is a great way to boost your credit rating. While this is not an entirely incorrect statement, it is worth finding out a little more about it to get you closer to, rather than further away from, achieving the dream of owning your own property. That being said, does taking products on hire purchase build your creditworthiness, or does it hurt it after all?

What is creditworthiness?

If you are at the very beginning of your journey towards having your own property, you need to know some basic concepts and the** differences between creditworthiness, credit history and credit score**.

In the simplest terms,creditworthiness (affordability) determines the amount of money you can borrow under a mortgage. Each bank calculates it slightly differently, so you may find that one lender will fund the purchase of a home with a maximum value of £250,000, while its competitors will agree to lend you £270,000. Typically,the maximum mortgage amount is between 4 and 4.5 times the applicants’ annual earnings. The higher your income and the lower your expenses, the larger the mortgage you will get.

**Your **credit history refers to the kind of borrower you have been up to now. If you have paid all your debts on time and have not requested an extension of the repayment period, we have excellent news for you - your bank will appreciate these efforts by offering you more attractive terms. If you have been late with an instalment payment in the past, you must expect your bank to have reservations about your application, although this will most likely not affect their decision to lend to you.

Credit score is derived from your credit history - it is a numerical indicator that assesses your credibility as a borrower. In addition to credit history, open bank accounts and credit cards held are also analysed. Interestingly, one way to improve your credit score is to register in your local electoral register. Registration is not complicated, so be sure to keep this in mind.

Ok, then what is the impact of hire purchase?

As you can easily guess, your creditworthiness will not benefit from instalment purchases - these are additional regular expenses, which increase your Debt-to-Income ratio. On the other hand, by buying a washing machine on instalments and making regular repayments, you will build or increase your credit history. While you shouldn’t set yourself up for a drastic change in your credit score, it is a way of gaining a few extra points, so if you are on the borderline between a ‘good’ and ‘excellent’ score, such a purchase may make sense.

What’s worth taking on hire purchase to build creditworthiness?

Above all, don’t make ‘artificial’ purchases. Buying items just to build up your credit history is simply pointless, as the extra costs will realistically hit you in the pocket. If you are serious about buying a property, consider raising more money for a deposit(10% instead of 5%). With more cash you will also gain in the eyes of the bank and reduce your debt rather than adding to it.

Avoid both very small and very large loans. In the case of cheap products, such as a kettle or toaster, for example, an instalment purchase is so unreasonable that an instalment of a few pounds is simply easy to overlook, ruining the whole concept of building a credit history. In addition, thebank’s analysts can check the value of your liabilities, in which case your actions will also have little impact. On the other hand, buying a TV or a car is not a good idea either - these are big expenses that will clearly put a strain on your household budget, so you have to expect a drop in your creditworthiness.

It seems optimal to buy items of average value (a few hundred pounds) that you may need for your new home. It can be a good idea to buy furniture, and if you have already chosen a particular property, you can also think about furnishings that will need replacing due to an upcoming renovation. By buying these types of products, you are building your credit history while spending your money wisely.

How do you buy on hire purchase to build creditworthiness?

While we can’t say that it’s “worth it” to buy something on hire purchase, the safest solution is to get one credit card with which you make regular purchases. It’s such a sensible move that many banks won’t charge interest for a few weeks, so transactions won’t put extra strain on your wallet. Of course, third-party providers can also be used, but it is the card that gives you the most freedom of use and will allow you to build up your credit history easily.

Remember that a limit on a credit card reduces your ability to borrow money to buy a house. It is for this reason that we suggest you don’t get too used to using this product solution - it’s a good idea to deactivate the card before applying to the bank. Additionally, maxing out your credit limit can have a negative impact on your credit score and, as we have already established, this is extremely important when applying for a mortgage. Try not to exceed 25% of your limit.

Also keep an eye on repayment deadlines - every day of delay has a very negative impact on your credibility in the eyes of lenders, and yet we are trying to build it! Liabilities of a financial nature (loans, leases, credits) have the greatest impact on your creditworthiness, so you need to pay particular attention to paying them on time.

Are there any alternatives?

You may be approaching borrowing with an abundance of caution - that’s very wise! If you don’t want to use a credit card or buy on instalments in any other way, we have very good news for you. You can opt for:

• Transferring some liabilities (e.g. electricity bills) to your spouse - you will both gain if you both build your creditworthiness at the same time;

• Switching to a phone subscription from a prepaid model - although this is a fixed commitment, the cost of using the phone will not increase drastically, while you will also gain the opportunity to demonstrate your punctuality in paying;

• Formally settling in one place - ensure that all bills are issued to one home address and one or two people (depending on whether you are applying for credit alone or with a partner).

Also remember to check for any irregularities with your electricity, water or gas payments - some of our customers had incorrect bills, which made them regularly late with their payments. All it took was a few emails to the utility provider and the problem was solved. We probably don’t need to explain that the creditworthiness of these people has clearly increased :)

Summary

We hope this guide has cleared up your doubts about hire purchase. Buying a property is a very serious decision, so we are very keen to make sure you know exactly how to prepare for this transaction. If you are ready to start on the road to your own home, be sure to contact us!

The first meeting with our advisor is completely free of charge and does not oblige you to anything. In a matter of minutes, we will check your creditworthiness, answer all your burning questions and advise you on the issues that are important to you. Don’t wait, free yourself from renting today!