Is your credit score affecting your ability to acquire a home loan?
Updated: Aug 18, 2022
Learn about credit scores, the factors that can impact it, and ways to improve your credit score in this article.
What's a credit score?
A credit score is a number determined by personal and financial information about you. It’s based on your borrowing and repayment history. Lenders use this score to evaluate your position whenever you apply for finance, such as a home loan.
A credit score is a number between zero and 1000. In some cases, it can be as high as 1200. The higher your score is, the better. It’s calculated based on numerous factors.
These factors include:
The amount of money you may have borrowed from a lender (i.e., for a mortgage, personal loan, car loan etc.)
The number of loan applications that you’ve made
Whether you pay your bills on time
Any bankruptcies or credit defaults in your name
How much you may have borrowed in the past
Why's a credit score important?
A healthy credit score is important for when you apply for a home loan or any other loan. Banks will look more favourably upon you when your credit score is higher. Credit scores are ranked differently depending on the agency calculating it. For instance, Equifax use a slightly different ranking system with scores going to 1200.
The graph below demonstrates Australia’s three biggest credit bureaus and their scoring system.
Factors that can affect your credit score
Numerous factors can affect your credit score. If you ever think about getting a home loan or buying an investment property, it’s crucial to be aware of these factors to ensure you're not jeopardising it.
Missing credit card or loan repayments/ paying bills late
This is probably one of the biggest factors that can affect your credit score. If you miss just one repayment, your credit score could drop by 22%. A missed payment counts if your payment is more than 14 days late. It will impact your score for up to two years.
Defaults can be listed on your credit file for debts that are overdue by 60 days and are valued at more than $150. They can also remain on your file for five years. Therefore, it’s so important to be on top of your repayments to avoid this.
Making too many credit applications
This is a BIG one that many people are unaware of. At REIF we see many new investors, interested in buying an investment property, get turned down due to making too many applications for credit.
Shopping around to apply for multiple credit providers in a short timeframe can negatively impact your credit score. So much so, they stay on your report for five years. Keep reading to see how you can avoid making this mistake as a borrower.
Missing ‘Buy Now, Pay Later’ repayments
If you’re somebody who uses Afterpay or similar platforms, be wary of missing your repayments. Failing to meet these repayments can lead to providers reporting missed payments.
What does that mean if you’re a home buyer?
If you’re thinking about buying a home or buying an investment property, it’s so important to be aware of your credit score. This can help you to make more informed decisions around borrowing and whether you may or may not be looked favourably upon at any certain time frame.
When you’re looking to finance a mortgage loan, we recommend frequently reviewing your credit score. You can visit the following credit file providers to get a better understanding of your position. Generally, they just require verification of identity by using a driver licence number and identifying information (name, date of birth and residential address).
Credit Simple - https://www.creditsimple.com.au/
Equifax - https://www.mycreditfile.com.au/
How to improve your credit score so you can acquire a mortgage
The biggest things that you can do to improve/ maintain a healthy credit score is to avoid the negative factors listed above. You can also do the following:
Lower your credit card limit
Make your payments on time (especially regarding rent or your mortgage)
Pay utilities on time
Limit how many credit applications you make (especially in a short period of time)
Another useful tip, especially, if you’re looking to apply for credit is to consult a finance specialist/ mortgage broker. These professionals are up to date with the latest loan products and can do a pre-assessment on your financials before applying for a loan.
Consulting a finance specialist can help reduce the number of loan applications that you make. Therefore, mitigating the chance of reducing your credit score. An REIF Finance Specialist is your go-to expert as they have access to over 40 lenders and can compare the most suitable offerings for you and at no charge.
To get in touch with us, reach out on the details below. We’d love to be able to improve your chances of home loan approval.
Ph: 1300 130 932