I recently established a presence on Instagram so that I can share my money insights with a broader audience. Today, I will be holding my first Instagram Live, which will also let me to answer viewers' money-related questions.

I've been concerned to see some personal finance information on Instagram which is very poor or just plain wrong. While I'm sure most of the people posting this content have good intentions, they clearly are misinformed.

Keeping Score

One area that seems to get a lot of coverage is the subject of credit scores and how to improve them.

Your credit score is a simplified measure of your financial and other personal data, which lenders use to help them assess your creditworthiness. Many people think that they need to have a high credit score to get accepted for credit or pay the lowest rate of interest.

Some Instagramers believe that one of the best ways to improve your credit score is through taking out a credit card and using it to establish a payment history. Both of these assumptions are wrong and reflect fundamentally flawed thinking.

Lenders usually rely more on your credit score when assessing whether, and on what terms, to lend to you on an unsecured basis. That means the lender has no assets to seize and sell to recoup their money should you default on repayments.

When it comes to a home purchase mortgage, your credit score is just one of several factors that lenders consider - more on this in a minute.

Think - Debt Is Not An Option

The shortest path to building wealth and the choices and options that it provides is to avoid all forms of debt except a home mortgage. That's because you need somewhere to live and if you don't buy a home with a mortgage, you'll still have to pay rent but won’t end up with an appreciating home asset.

Avoid all other forms of borrowing, whether that's an overdraft, credit cards, or loans which fund consumption or the purchase of depreciating assets like cars. When you tell yourself that debt is not an option, it’s amazing how much less you spend and how you find other ways to fund the spending you do want to do.

“When you tell yourself debt is not an option, it's amazing how much less you spend and how you find other ways to fund the spending you do want to do.” Tweet This

Painless Spending

Credit cards encourage you to spend money you don't have or to spend more than you would otherwise do. Research shows that people using credit cards or contactless payment methods spend, on average, about 30% more than if they pay with cash or a bank transfer.

The less connected you are to the pain of buying, the more you'll spend. And with a credit card, because the money doesn't leave your bank account immediately, the pain of buying is reduced. That suits both companies selling goods and services and the financial sector that wants to make money from you being in debt.

And if you aren't borrowing on an unsecured basis, three things follow:

Your credit score will be far less of an issue on a day-to-day basis because you aren’t seeking credit.
You'll have no monthly debt repayments that you could ever fail to pay and which would harm your mortgage-related credit score.
You'll have more disposable income with which to save a deposit for a home purchase.

What Really Affects Getting a Mortgage

The UK mortgage market has changed a lot over the past few years due to the introduction of much stricter rules in the way that lenders assess what people can borrow. And as the Coronavirus pandemic has developed, and the jobs outlook has worsened, lenders are worried about a fall in property prices and the risk of them incurring losses.

David Houchell is a very experienced mortgage broker who I have known for several years. I asked David what the critical factors are that currently affect people's ability to get a mortgage, and to do so on competitive terms.

Deposit

How much you put down is one of the most critical factors. David advises "Deposit levels are more important than ever at the moment. Ideally, you need a minimum 15% [of the purchase price], although interest rates have recently risen considerably at this loan to value. A 20% deposit will reduce rates a little more and then even more for a 25% deposit. A 40% deposit will give you the widest choice of lenders and the lowest interest rates."

2. Affordability

Where two people have the same income, the one with lower outgoings will find it easier to get approval and borrow higher amounts than the one with higher outgoings. "At present, it seems lenders are nervous of those with high levels of non-mortgage commitments," comments David.

3. No Missed Payments

As well as existing or previous borrowing, you also need to be mindful of things like mobile phone contracts. "Any recently missed payments will certainly affect a lender's assessment. They will usually overlook a one-off, but any repeat incidents are a problem for most would-be borrowers," advised David.

4. No Past Legal Issues

County Court Judgments (CCJ) or Individual Voluntary Arrangements (IVAs) creditor arrangements can freeze you out of the mortgage market. David told me that "The choice of lenders is currently particularly limited in the adverse credit market. It is far more difficult to obtain a mortgage with past adverse credit unless you have a very high deposit (above 25%) and the adverse was two years ago or more."

5. Electoral Roll

Being on the electoral roll is vital as it helps establish your identity footprint. "Your credit score usually receives a boost when you are on the electoral roll. It can also prevent lenders from looking too deeply into your address history, which might be useful if you've moved about a lot."

6. A Stable Address

Not having moved home too much in the past also helps with your credit assessment. As David explains, "Lenders like this, as it will avoid 'refer' decisions, which usually happens with applicants with multiple address changes in the past five years."

Avoiding all unsecured debt will lower your credit score slightly.

But the benefits of having a higher disposable income with which to save a bigger house deposit, never being able to miss a credit repayment and having lower fixed overheads maximises your ability to buy your first or next home.

Warm regards,

Jason

P.S. You can join me live on Instagram every Tuesday at 7.30pm @jbthewealthman and ask me your money-related questions.

David Houchell can be contacted at: https://www.houchellmortgages.com

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