Your credit score and why it\u2019s important.
\nWhat is your credit score? How can it impact your ability to take out a home loan, buy a house, serving a home loan?\u00a0
\nYour credit rating or \u2018credit score\u2019 is a numerical score that represents how trustworthy your reputation is as a borrower.
\nThat means it\u2019s a pretty important part of the process when applying for a loan according to Mark Polatkesen, Director and Senior Mortgage Broker at Mortgage Domayne. \u201cYour credit score says a lot about your financial history,\u201d he says. \u201cGenerally, this includes amounts you\u2019ve borrowed in the past, how many loan enquiries and applications you\u2019ve made previously, and your record of repaying these loans.\u201d
\nHe adds, \u201cThat makes knowing your credit score is a vital part of understanding your credit health because it will directly influence the amount of credit that a lender will make available to you as a borrower (your credit limit) and, depending on your score, it could also impact the term and interest rate they will offer. \u201c
\nHow is your credit score calculated?
\nIn Australia, there are three main national credit reporting agencies \u2013 Equifax, Experian and Illion, that collect a wide array of information which they use to determine your credit score.
\nAs there\u2019s no universal system, each agency uses their own methods to calculate your credit score, analyse your credit history, credit profile and past credit applications, so they can obtain a better understanding of your behaviour as a borrower. That means there will also be differences in their scoring systems. For example, Experian and Illion have a score range of 0 to 1,000, while Equifax Australia has a score range of 0 to 1,200, with the result that your credit profile may differ between credit score providers. Each of the three agencies listed here allow you to order a free credit report once every 12 months, making it easier to get a better idea of your credit history across all of them.
\nHistorically, credit reporting focused primarily on negative credit events. But the introduction of Comprehensive Credit Reporting (CCR) in Australia has meant that both negative and positive information can be included on your credit report. This ensures that any positive actions you make, like making monthly payments on time, are also noted. Additionally, CCR now requires lenders to share more data. Previously, only information about credit enquiries, credit provider names and overdue credit account details was recorded in consumer credit files. Now, additional information such as the type and amount of credit applied for, credit limits for each account and repayment history are also included.
\nThe result is a more accurate and comprehensive picture of your credit history than ever before \u2013 which may well assist those with a thin or short credit history and reduce the impact of a single negative event. For example, with more information available to credit reporting agencies, Mark says you may well see an improvement in your credit score if you\u2019ve been good with your repayments. But he cautions that credit scores are only as reliable as the information that has been provided to credit reporting agencies and your lender. \u201cThe more information credit reporting agencies have at their disposal, the more accurate your score is going to be.\u201d
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\nWhat credit score should you aim for?
\nThe higher your score the better, because it will affect your access to better loan and credit card deals. The following credit score bands are from Equifax and are as follows:<\/p>\n
Excellent: 841 \u2013 1,200
\nVery Good: 756 \u2013 840
\nGood: 666 \u2013 755
\nAverage: 506 \u2013 665
\nBelow Average: 0 \u2013 505<\/p>\n
So, what factors do credit reporting agencies look at in determining your credit score?
\nCredit reporting agencies will take a number of factors into account when calculating your credit score.
\nYour Credit History.
\nYour credit history is assessed based on factors including:<\/p>\n
The presence of high-risk indicators like defaults, bankruptcies, court judgements and credit infringements can all negatively impact your credit score and can stay on your credit file for 5 \u2013 7 years.
\nThe type of credit providers you\u2019ve submitted applications to in the past. For example, the degree of risk can vary depending on the type of credit provider you may have used previously, with payday loan applications viewed in a different light to loans from a bank.
\nRepayment history of your credit accounts. Consistent on-time repayments can contribute positively to your credit score.<\/p>\n
Your Credit profile.
\nFactors impacting your credit profile include:<\/p>\n
The age of your credit history. Holding a shorter credit history often represents a different level of risk to one that is much longer.
\nYour personal details including your age, duration of employment and how long you\u2019ve lived at your current address.<\/p>\n
Previous Credit applications.
\nConsideration will also be given to your previous credit applications including the following:<\/p>\n
The amount and type of credit you\u2019ve applied for in the past. Every time you apply for credit an enquiry is recorded which remains on your credit report for five years. According to Mark, \u201cIf there are too many enquiries recorded over a short period of time, it could raise a red flag to your potential lender that your finances are in poor shape.\u201d
\nHaving fewer and more infrequent credit enquiries is typically preferred.<\/p>\n
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\nSo, what can you do to improve your credit score and improve your chances of obtaining a home loan?
\nThe list of things that can affect your credit report, for better or worse, is pretty lengthy, but if you\u2019re looking for some pointers to help push your credit score in the right direction, here are Mark\u2019s top tips to get you started.
\nGet on top of your bills and debts.
\nMark\u2019s number one tip? \u201cIt\u2019s really just common sense, but the best thing you can do if you ever plan to apply for a loan, is to pay your electricity, water, phone, credit card and other bills on time. While some creditors might provide a little leeway every now and again and\/or only impose negligible late fees \u2013 don\u2019t rely on these. Paying your bills on time each month can help to boost your credit score, allowing credit reporting agencies and lenders to look to your past behaviour as an indicator of how you\u2019ll act in the future. Doing things such as setting up direct debits, building a budget and letting your creditors know ahead of time if you think you\u2019ll be unable to pay, will all also help you keep on top of your payments.\u201d
\nLower your credit card limit.
\nTip number two? \u201cIf it\u2019s possible, lower the limit on your credit card,\u201d says Mark. \u201cNot only will it help with the excessive spending, but again it can assist in improving your credit score.\u201d
\nHe also recommends considering credit cards with no annual fees, lower rates of interest or ones that offer initial no interest periods, but cautions against applying for too many credit cards or loans.
\nKeep your credit enquiries to a minimum.
\nAccording to Mark, your credit score doesn\u2019t just come down to how much you\u2019ve borrowed, or even how many loans you\u2019ve taken out or are paying back; it also reflects how many enquiries and applications you\u2019ve made previously.
\n\u201cEvery time you apply for credit, a credit enquiry is left on your credit report,\u201d he notes. \u201cSo, having too many credit enquiries in a short period of time can act as a red flag and reflect poorly on your credit score as it can appear to potential lenders that you\u2019re desperate for credit or struggling to get approved, even if you\u2019re in good financial standing.\u201d To avoid this issue, he recommends always taking a step back and considering whether you actually need the loan or credit card right now, always doing your research and only proceeding with an application when you\u2019re sure you are ready to apply.
\nHowever, what won\u2019t have a negative impact on your credit score is checking it. Says Mark, \u201cIt\u2019s a persistent \u2013 but completely incorrect \u2013 myth that asking to see your credit report will negatively affect your credit rating somehow. So, don\u2019t let this be a barrier to finding out our credit rating so you can then take the necessary steps to improve it\u201d.
\nCheck your credit report for any inaccuracies.
\nTaking some time to check your credit report properly can help you find details that might be negatively impacting your credit score. Well ahead of applying for a loan, Mark recommends that customers take a look at their reports from the three major credit reporting agencies to see if anything stands out. \u201cIf you do find anything that doesn\u2019t seem quite right, clarify it with your creditors or find out more from the relevant credit reporting agency.\u201d
\nDo nothing!
\nThis may sound counter-intuitive, but according to Mark sometimes doing nothing can actually help your credit score. \u201cEach day that passes without you jeopardising your file gets you a step closer to the expiry dates on credit inquiries and black marks that may be negatively impacting your score.\u201d
\nIn conclusion\u2026?
\nWhile it doesn\u2019t necessarily guarantee your application will be approved, having a positive credit history can put you in good stead when submitting your next personal loan, home loan or credit card application, noting that while it\u2019s an important factor in the approval process, it\u2019s not the only one considered, with lenders taking other factors, such as your ability to service a loan or credit card, into account.<\/p>\n","protected":false},"excerpt":{"rendered":"
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