Securing a home loan approval and fulfilling the dream of homeownership often hinges on a crucial factor: your credit score. Your credit score plays a pivotal role in determining your loan eligibility, interest rates, and loan terms. A higher credit score not only increases your chances of loan approval but also opens doors to more favorable borrowing options. If you’re looking to improve your credit score and enhance your prospects of obtaining a home loan approval, you’re in the right place. In this blog, we will provide you with the top 10 tips on how to improve your credit score, empowering you to take control of your financial future and pave the way to homeownership.
Understanding credit scores and their impact on home loan approval
What is the role of credit scores on a home loan application?
Credit scores play a significant role in the home loan application process, particularly when it comes to home loan pre-approval and the overall timeline for loan approval. Lenders use credit scores as a measure of an individual’s creditworthiness and ability to repay a loan.
How long does home loan approval take? It depends on a lot of factors, but typically takes around 4-6 weeks.
How does the credit score play into your home loan application?
- Credit scores are used by lenders during the home loan pre approval process to assess your creditworthiness. A home loan pre approval is an initial evaluation of your financial situation, and it provides an estimate of the loan amount you may qualify for.
- Lenders use credit scores to determine your likelihood of receiving full loan approval later on. A higher credit score increases the chances of obtaining pre-approval and demonstrates your ability to handle debt responsibly.
- A higher credit score indicates a lower risk, potentially expediting the approval process. Lenders may require less documentation and perform fewer verifications for borrowers with good credit scores.
- If there are concerns about an applicant’s credit history or a lower credit score, lenders may request additional documentation or explanations. This can lengthen the approval timeline as borrowers need to provide the required information to satisfy the lender’s requirements.
- In cases where an applicant has a low credit score or a complex credit history, lenders may conduct more extensive credit assessments. This can involve manual underwriting and additional scrutiny, resulting in a longer approval timeline.
- Some lenders have specific credit score thresholds for their loan products. If an applicant’s credit score falls below the lender’s minimum requirement, it can lead to an automatic decline, resulting in a faster rejection but a shorter overall timeline.
What affects your credit score?
A credit score is a number between 0 and 1000 which rates your creditworthiness. Anything above 500 can be considered an ‘ok’ score and of course the higher the better. This is something that banks, telco’s and insurance companies are looking very closely at and some will offer cheaper deals for people with higher credit scores.
If you have a low score we recommend having a close look to work out why and then try to increase your score as some banks and other companies may not want to lend you money or offer services with a low score.
Here is a general guide on credit score brackets:
- Seriously low score (1 – 299): If your sitting in the bracket then you most likely have a credit default, multiple defaults or even have been bankrupt in the past. There are two things which will help to fix this 1) Time… 2) pay your bills on time, every time.
- You can do better (300 – 499): You’re below average. You may have an old default or have missed many repayments, you may have applied for too many credit facilities in the past few months – 1 year, or you may be younger and not have had much credit, this can cause a low score simply because there is a lack of data.
- Steady Eddie (500 – 699): Close to 25% of the Australian population are in the bracket. Things like having a mortgage & paying your bills on time with help you increase your score quickly from here. Many people in this bracket may not have a large credit file, meaning there isn’t a lot of good data but theres also not negative data so you end up with a score around the half way mark.
- In a good place (700 – 799): With more Australians fitting into this category than any other you’re doing well, as are most of us. You’re likely paying bills on time, have had credit for a while, possibly even a mortgage. Keep up the good work, don’t apply for too many credit facilities in a short period of time and you likely increase that score to the next bracket soon.
- Killing it (over 800): Anything over 800 means your seriously killing it with your finances and you should be giving yourself a good pat on the back. Seriously, do it now. ‘pat pat’ 😉 If you’ve managed to hit a perfect 1000 then consider yourself a ‘Credit GOD’ and you sit with only a few percent of Australians on the ‘Credit Throne’. You’re likely paying everything on time, are in an older age bracket and have a mortgage and or an investment property.
And this is me, Quinto:
Once upon a time, a long long time ago, in a land far far away, my credit file wasn’t so flash. I even had a default on it! But I have managed to increase my score over the years and am now in the top bracket. So if you have a low score, never fear, you can fix it!
How to improve credit score Australia: top 10 tips
1. Get a hold on your finances
As you grow older, you may have a better understanding of financial management and demonstrate greater stability in your credit behavior. Lenders often consider age as a factor in assessing creditworthiness, so maintaining a positive credit history as you age can have a positive impact on your credit score. Take advantage of your experience and financial maturity to make wise credit decisions and showcase responsible financial management to lenders.
2. Pay your bills on time
Positive credit reporting is coming in, in fact its already started with many providers and many more will follow soon. It has always been a case that when a bill is paid late it can decrease your credit score, now with positive reporting when you pay on time it can have a positive effect and increase your score.
3. Pay defaults
If you have a default, then pay up! A default is when you have not paid a bill on time, it is then lapsed for many months and the provider has passed it onto a debt collector, it is at this stage they will add a credit default onto your file. Bank and other credit providers REALLY don’t like this but paying it will help and after 5 years it will be removed from your file.
4. Avoid applying for multiple credit products
This included telco’s (phone plans). If you’re someone who gets personal loans and credit cards regularly, you will most likely have a low score as this is seen as poor money management. Rule of thumb, one to three inquiries spaced out over a year is likely okay. Any more and it may have a negative effect but this will also depend on the type of inquiries.
5. Reduce credit card balances
Aim to keep your credit card balances low. High credit card utilisation (the ratio of your credit card balance to the credit limit) can negatively affect your credit score. Strive to keep it below 30% to demonstrate responsible credit management.
6. Limit credit enquiries
Be cautious when authorizing credit checks. Too many credit enquiries within a short timeframe can raise concerns for lenders. Only authorise credit checks when necessary.
7. Diversify your credit mix
Having a mix of credit types, such as credit cards, personal loans, or mortgages, can demonstrate responsible credit management. However, only take on credit that you can manage effectively.
8. Maintain your old credit accounts
Closing old credit accounts may negatively impact your credit score. Keep older accounts open, especially if they have a positive payment history, to maintain a longer credit history.
9. Be cautious about Buy Now Pay Later schemes
While buy now pay later (BNPL) schemes can provide convenience, it’s essential to exercise caution when using them. Some BNPL providers may not report your payment history to credit bureaus, which means your responsible payment behavior won’t positively impact your credit score. However, missed or late payments can still have a negative impact.
10. Check your credit report regularly
Obtain a copy of your credit report from credit reporting agencies like Equifax or Experian. Review it for any errors or discrepancies and promptly dispute any inaccuracies to ensure your credit report reflects accurate information.
There are many places to check your credit file but be careful as some may put an inquiry on your file and this could have a negative effect. Personally, I recommend using Creditsimple.com.au where you can get a free credit report including your score and get it right away. Remember to not set your preferences so you don’t receive marketing emails.
I hope this has helped, if you need any further info feel free to get in touch anytime.
