In all likelihood if you have ever applied for credit in your adult life, such as a mobile plan, an internet plan, a credit card, or any sort of personal loan, there is already a credit report about you.
Your credit profile is crucial when applying for any large sums of money including a home loan. Lenders use a range of criteria to assess your suitability to lend you money, including your credit score. So it is important to have a good credit history and rating as it improves your chance of receiving the credit you need.
What is a credit score?
Your credit score, often referred to as a credit rating, gives a lender insight into how likely you are to repay the money they lend you.
Your credit score is based on your credit history, which is called a credit report, and is influenced by a number of factors such as:
- Your payment history, which is whether you pay your bills on time.
- How many times you applied for a loan or a credit card in the past.
- The type of loan and the amount you want to borrow.
- Your debt default history.
- Whether there are any default judgements against you.
A credit report tells a lender how reliable you are and how good you are at managing your finances. This allows them to make a decision about your ability to make monthly loan repayments.
There are three main credit reporting agencies in Australia — Illion, Experian and Equifax. Each one has its own set of credit score ranges, which means you can get a different credit score depending on the agency. Also your credit score can vary from month-to-month as credit agencies produce them at a specific point in time.
What is a good credit score?
What is good credit score? The following table gives you a basic breakdown on the rating each reporting agency gives for credit scores.
Source – Illion, Experian and Equifax websites
Now let us break down what each category means and how each one affects your credit rating:
- Poor. A poor credit score means your chance of getting a mortgage is low. There may still be some lenders who will approve a home loan, but they will charge a higher interest rate or request a guarantor.
- Average. When you have an average credit rating, lenders will consider you have a high chance of defaulting. They will need to evaluate your financial situation more closely if they are going to approve a home loan.
- Good. Falling into the good category means you are at low risk of defaulting on your home loan in the first 12 months. There is a good chance of receiving approval for a loan.
- Very good. Lenders will consider you a good risk with a very good credit rating so you are likely to receive a mortgage.
- Excellent. When you have a credit score in the excellent range you will find receiving approval for a mortgage a simple process. You represent an extremely low risk to a lender of defaulting on repayments in the next 12 months. Lenders may offer you better mortgage options and interest rates.
When you have not used much credit in the past, you may also have a poor credit rating or not have one at all. It simply means there is not enough data available to work out your creditworthiness.
You may be wondering, “what is my credit score?” There are websites where you can check your credit rating for free. All you need is your name and address, and proof of identity such as a passport or driver’s licence. It can be a good exercise to check you credit rating when planning to buy a house.
How do I get a credit score?
Anyone who provides you with credit has data about how you pay your bills or invoices. All credit providers can send information to credit reporting agencies. They use this information along with publicly available information to compile a credit report. This report gives an overview of your creditworthiness. Credit reporting agencies then use their own algorithm to interpret the data into a credit score.
Where credit reports were once only based on negative financial information, this has changed. Credit providers now also need to report good financial behaviour.
Credit report information
To know how to increase credit scores, you need to understand what goes into a credit report.
Maxing out your credit card and maintaining high credit balances will negatively affect your credit score even if you make regular payments. Maintaining a decent balance between your credit limit and what you actually spend has a positive impact.
Check your credit report from time-to-time as mistakes can happen. If you think your credit rating is lower than you expected, request a free copy of your credit report. When you receive it, look for mistakes.
The factors that make up your credit report include:
- Identifying information. This is the information that will identify you such as your name and address, and date of birth.
- Credit account information. For every creditor and lender in the previous two years, it will include:
- ~Type of credit (for example, mortgage, personal loan, credit card)
- ~Credit provider
- ~Amount of credit
- ~Date of opening and closing the account.
- History of repayments. The history of repayments for each credit account will include:
- ~Repayment amount.
- ~Due dates.
- ~Whether you paid and if you paid on time.
- ~Any missed payments (remaining unpaid after 224 days) and whether you did eventually make the payment.
- Defaults. Defaults also includes any non-payment of utility and phone bills. Defaults stay on your credit report for 5 years and will show if you paid the debt. You service provider can report a default if:
- ~You owe more than $150.
- ~They cannot get in contact with you.
- ~It is more than 60 days since the due date.
- ~They have requested payment either by phone or in writing.
- Credit applications. When you apply for credit, your report will show:
- ~How many applications you made.
- ~How much you borrowed.
- ~If you guaranteed any loans.
- Other information. Other information included in your credit report can be any court judgements, debt agreements, bankruptcies or insolvency agreements in your name.
How are credit scores considered during a home loan application process?
Your credit score can affect whether you receive approval for a home loan or not. Lenders consider credit scores as part of their risk assessment when assessing your application. Your credit score will help them decide whether to approve your loan application. It can also help them determine how much they will lend you, the term of the mortgage and the interest rate offered.
The lower your score, the higher the risk you are to a lender. The higher your credit score, the more it tells a lender about how you manage your finances.
If your credit score is not as high as it should be, you need to know how to improve your credit score.
How do I maintain and improve my credit score?
Improving your credit score is a long-term goal and does not just happen overnight. Understanding some simple things will give you insight into how to improve credit scores. Here are some strategies to try:
- Pay your bills on time. Making late credit card, water, telephone, electricity bill payments, for example, can negatively affect your credit rating. If you have trouble remembering due dates, set up direct debits fortnightly or monthly so you do not forget.
- Gradually lower the limit on your current credit cards. If the limits on your credit cards are high, consider lowering the limit as you pay them off so you are not tempted to max them out.
- Know what your regular expenses are and put a budget in place that will allow you to save money regularly. Instead of spending all your spare cash, move it into a savings account that is difficult to access.
- Create a payment plan for any outstanding debts and stick to it.
- Consider how many loan or credit card applications you make. These can have a negative effect on your credit score as it shows how many loan applications you made and were not approved.
- Check your credit report. Check the information to make sure it is correct.
- Consider consolidating your debt into one loan if it makes it easier to pay off.
While it is challenging, the sooner you work on increasing your credit score, the sooner it will improve.
Get the home loan interest rate you deserve
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