When you’re applying for a home loan, lenders are going to look at many things apart from the property in question. They’re obviously going to pay very close attention to you, and your suitability as a borrower. One of the things they focus on when determining that suitability is your credit rating.
The difference between having a good credit report and a bad one can make a world of difference when it comes to the loans that you’re likely to get. You may get approved for a loan with a mediocre credit file, but you’re going to get a much higher interest rate than someone with a better credit file who is seen to be a less risky borrower. In other words, being a good borrower and having a history of doing so can save you thousands and thousands of dollars over the lifetime of your home loan.
What’s your credit rating?
Your credit file is an amalgamation of your credit history. According to credit reporting company Veda, a credit report includea: consumer credit information, such as credit applications made in the past five years, any overdue consumer credit accounts, credit accounts like credit cards or personal loans, ccount open date and close dates, credit limits, and repayment history; publicly available information, such court judgements and court writs, directorship details, proprietorship details, bankruptcy, debt agreement, and personal insolvency information; and commercial credit information like credit enquiries pertaining to applications for credit for commercial purposes, details of overdue commercial credit accounts, and public record information.
Your credit score rests somewhere on a scale from 0 to 1200: An ‘Excellent’ score is anywhere from 833-1200; A ‘Very Good’ score is anywhere from 726-832; a ‘Good’ score is anywhere from 622-725; an ‘Average’ score rests is anywhere from 510-621; and a ‘Below Average’ score is anywhere from 0-509. Many people don’t have any idea whether or not they have a good or bad credit score. After all, the only time you’d really come up against it is when you’re applying for a loan. A home loan is generally pretty large, so you should know what you’re up against and the likelihood of your loan getting approved before you start all of the paperwork. You can request a copy of your credit file from credit reporting agencies Veda, Dun & Bradstreet, or Experian. Once you get it, examine everything and make sure that it’s all accurate and up to date. Mistakes are made all the time and it can really cost you if you don’t know that an error exists. This is especially true when it comes to identity fraud, an example of which is when someone opens credit accounts in your name for their own use.
In 2014, Australia starting using a comprehensive reporting system, as opposed to the negative system it had before. With the negative credit reporting system, the only things that were recorded were negative actions. Now, however, Australia uses Comprehensive Credit Reporting (CCR), which includes information on your current accounts, when each one was opened/closed, any paid default notices, and your repayment history. The idea behind the switch was that CCR makes it easier for lenders to make a comprehensive and balanced assessment of an applicant’s credit history if they can see more of it as opposed to just the negative aspects. For example, if you had a previous bankruptcy on record but have opened several lines of credit and have repaid those loans since, the previous system would not have a record of your positive transactions, only the bankruptcy.
Remember that lenders aren’t just snooping into your credit history to be nosy; they want to protect their investment, and the way for them to do that is to vet every borrower to ensure that they’re able to repay their home loan at indicated in your agreement. Defaulting on your loan because you can’t afford to pay is bad for you, but it’s also a nightmare for them, so they want to avoid any unnecessary risks as much as possible.
You should be keeping track of your credit file and reviewing it once a year. Mistakes are often made, and you’re the one who has to rectify it. The best way to care for your credit file is simply being responsible: repay any outstanding debts on time and ensure your records are up to date. If you know that you’re going to hit a rough patch financially, then call your creditor and see if a solution can be agreed upon before things get too far out of hand.
My credit is already poor. Now what?
If you have a history of bad credit, don’t despair. Credit isn’t stagnant. It continues to be recorded, so you always have a chance to turn things around. Results won’t be immediate, but it’s better late than never.
The most effective tool when turning around your credit is also the slowest, and that’s paying all of your debts on time. Whether it’s your mobile phone or your credit card, make sure that you stay on top of those payments. This will give you a proven track record of being responsible with your debt.
Get a credit card if you don’t have one. You’d think that the less debt you have the better, and that’s true, but the more credit you have available to you shows that you’re managing your available limits responsibly and that you don’t need to borrow money in order to stay afloat. What you don’t want to do, however, is apply for more than one credit card – or any other loan – at the same time. Too many applications show lenders the opposite; that you are bad with managing your money and that you need to borrow as much money as you can in order to manage your lifestyle.
Another sign of a low-risk borrower that lenders like to see is stability. Stability can be subjective, but a couple of telltale indicators are the ability to hold down a job and a residence. If you have been with your current employer for a while and have had a fixed address for a sustained period of time, both of those will work in your favour.
Unfortunately, when it comes to repairing poor credit, there isn’t a quick-fix option. You can take action right away, and you should, but it will take a bit of time for you to slowly start seeing your score creep up again. If you get started repairing your credit before you apply for a home loan, however, you’ll be in much better shape and receive a much more favourable loan than you would have otherwise.