One of the factors lenders consider when reviewing your home loan application is your credit score. Your credit score is based on a range of different personal and financial information which all combines to give a picture of how you manage your finances.
Accessing your credit report
There are three companies that hold credit information about Australians. If you’ve ever applied for credit, a loan or even a post-paid mobile phone, then there will be a credit report about you.
You can access your credit report every three months for free, and most organisations recommend you check your credit report at least once a year. Part of your credit report may include a numerical score and rating, ranging from low through to excellent.
You can contact either of these three credit reporting agencies for your free credit report:
How is your credit score calculated?
Information that is included when calculating your credit score is:
- Your current debt levels and overall amount you have borrowed
- How many credit applications you have made
- Whether you pay your loans and bills on time
Scores range from zero through to 1,200 (depending on the reporting company) and the higher your score the lower your credit risk. This means people with a higher score are likely to have their loan application looked at more favourably.
How does your credit score affect your home loan application?
A low score can impact your ability to get your home loan approved. The score alone is not the only factor, the lender will take a look at all of the factors contributing to the score to determine whether or not they will approve your loan.
What’s in your credit report?
There’s lots of information contained within your credit report including:
- Personal information: name, gender, age and DOB, licence number, employer and current and previous addresses.
- Your credit rating/score: low/fair/good/very good/excellent and may also show your credit score ranging from 0-1,200.
- Credit products: any credit you’ve had in the last 2 years including repayment amount, due date, how often you paid on time and missed payments.
- Financial hardship: if you have entered into any financial hardship agreements with your creditors due to hardship such as illness, natural disasters, job loss or other situational issues you face.
- Defaults: a default is a debt over $150 that you haven’t paid for over 60 days. The creditor must notify you before they place the default on your credit record. Defaults stay on your credit file for five years even after you have paid it and up to seven years if they cannot contact you (called a clear-out).
- Credit applications: this will show the number of credit applications you’ve made, how much you’ve borrowed overall and if you are a guarantor on any other loans.
- Bankruptcy and debt agreements: any bankruptcy or debt agreements you’ve entered into plus any court judgements or personal insolvency events.
- Credit report requests: all enquiries or requests for your credit report will also be shown on the file.
Is there a minimum credit score you need to be approved?
There is no set minimum credit score lenders use to assess your loan application. Some lenders may have minimums they work towards internally, however they don’t publicly say what this is at any given time. They may also change this from time to time depending on what their credit appetite may be at a particular point in time.
That said, your credit score is only one piece of the puzzle the banks use to assess your home loan application. Your employment, income, spending habits, assets, liabilities, and repayment history are also important pieces of the puzzle.
The biggest question for the lender is, “Can this person repay this debt”. If the answer is yes, now and in the future (such as if interest rates increase) then you should have no trouble securing a home loan.
What happens if there is a mistake on your credit report?
Mistakes on your credit report can happen from time to time. Perhaps you applied for a loan and then changed your mind, paid out a credit card or a lender incorrectly recorded a late payment.
If you spot an error on your credit report, you can contact the credit reporting agency and request they fix it for free. You may be required to provide evidence to support your request such as the final credit card statement and letter confirming it’s closed or a letter from the lender advising your application was withdrawn.
Is there a way of improving your credit score?
Yes, it all comes down to how you manage your debt, repayments and payments for things like utility bills. This generally takes a bit of time as you need to be able to show regular, on time repayments for your debt. Here are some things you can do straight away:
- Create a budget by figuring out your income and expenses
- Ensure you make consistent, on time debt repayments
- Make yourself a plan for paying off your existing debt
- Reduce discretionary spending and try to funnel some of this into your savings instead
Ready to talk about your home loan situation? Get in touch!
Image via Credit Savvy.