How you can effectively improve your credit score

By Gerv Tacadena

One of the most crucial things that could make or break your home-loan application is your credit rating.

One of the most crucial things that could make or break your home-loan application is your credit rating. Think of this number as a representation of your credibility as a borrower — the higher your score is, the higher the chances of you getting the lender's approval stamp. On the other hand, if your credit score is inadequate, do not expect to get a call and hear good news.

Losing points from your credit score is easy, but earning them back could be a struggle. If you find yourself stuck between home-loan applications and unable to get approval due to your low credit score, do not fret — there are actually tried-and-tested ways to boost your rating.

Know what your credit score means

Your credit score is a representation of your credit history. Lenders usually rely on your credit report when assessing your home-loan application. They use your credit score to determine the possible risks they might face in case of any unforeseen events that would render you unable to meet your obligations.

With a good credit score, lenders would be more inclined to do business with you. They could even offer you with useful home-loan features and competitive interest rates if you are in good credit standing.

Credit reporting agencies like Equifax, Experian, and Ilion use a numbering system from zero to 1,200 to reflect your credit score. Depending on your score, you are rated on a five-point scale, from below average to excellent. According to the Australian Securities and Investments Commission (ASIC), your lender uses the scale to determine how risky it would be for them to let you borrow. Your score will fall somewhere on the following scale:

  1. Excellent — This means that your lender thinks it is highly unlikely that an adverse event would be recorded on your credit file in the next year. Adverse events include defaulting on the loan, personal insolvencies, court judgments, and any similar event that might affect your ability to repay the loan.
  2. Very Good — If you are in this territory, you can still expect great deals from your lender. Getting in this score band means your lender does not think there is any chance that your credit score gets worse in the next 12 months.
  3. Good — You still have a high chance of getting approved if your score falls on this part of the scale. Your odds are better than that of the average population.
  4. Average — This is where it gets tricky — if you score rated average, it means your lender thinks it is likely that an adverse event might be recorded on your credit file in the next year or so. Do not expect too much if your score falls here.
  5. Below Average — This rating tells your lender that it is highly likely that an unforeseen event might affect your credit file. The odds of you getting approved for a home loan with this credit rating are close to zero.

Check how your credit score is computed

Credit reporting agencies usually do not divulge how they compute credit scores but they typically utilize collected financial and personal information to evaluate your credibility as a borrower.

The information might include your age, type of credit providers you have used, how much you have borrowed, the number of credit applications, unpaid and overdue loans, debt agreements, and personal insolvency.

However, most financial professionals believe that the bulk of your credit score depends on only two things: current debt balances and payment history.

Reducing your existent debt

Given that your current debt balances make up a considerable portion of your credit score, it is strategic to target this first when you are aiming to increase your credit score.

Debt balances affect your credit utilization rate, which tells how much of the credit available to you is already used. It is not advisable to max out your utilization rate — doing so would decrease your chances of getting approved for a home loan. Keep this in mind: the lesser the amount you currently owe, the better for your credit score.

To improve your credit rating, check your existing debts and see which ones should be paid off first. The bigger your current debts are, the longer it would take you to see improvement in your credit report.

Want to know how you can get out of a debt trap? Check out this guide.

Keep track of your credit commitments

You have to be a little bit more organized with your finances if you are looking to increase your chances of getting a high credit score. It is vital to keep tabs on every credit commitment you have to have a precise idea which ones needed immediate action and which ones could be set aside for a moment.

Creating a debt tracker is particularly useful if you do not have an ideal payment history. While you might not be able to change what has already been recorded in your credit file, you have an opportunity to start anew by paying your bills right on time moving forward.

By keeping a record of your financial obligations, you can also quickly pinpoint any discrepancies from your credit report. You should be able to cross check your documents to see which ones are questionable. If you find inaccuracies in your report, do not waste time and contact the credit rating agencies or the credit provider right away.

Your Mortgage has a tool that can help you keep track not just your financial obligations but also your income. Check out the Income and Expenditure Worksheet by clicking here.

Set-up a payment calendar

You should not rely on memory alone to keep track of your due dates. Setting up a system that reminds you to pay your bills on time can help you in your quest to improve your credit score.

There are many ways to do it. For instance, you can use calendar apps on your mobile phone to set up alerts on when to pay particular bills. You can even do this using your email calendar.

If you are not that tech-savvy, writing in a diary or daily journal can also help you remember to pay bills on time.

You can also set up automatic payment systems. Some banks offer auto-debit schemes that take money from your savings account to pay your bills.

The goal here is to create a habit of paying your bills on schedule. Since payment history makes up a significant part of your credit score, never missing a due date would mean a lot in improving your standing.

Keep unused credit cards open

While it is true that you should limit your sources of debt, it is still wise to keep your unused credit card accounts open, especially if they are not charging you annual fees. Maintaining these unused accounts will ensure that the amount of credit available to you is large enough, keeping your credit utilization ratio low.

You might think that applying for new credit cards and not using them would do the same trick, increasing the amount available to you and lowering your utilization ratio. However, this would not work the same way. Opening a new credit card creates an inquiry on your credit report, and it could negatively affect your credit score.

Maintain an active credit account

Since you want to prove that you are a more responsible borrower than what your current credit score shows, you should make an effort to keep your records clean. One way to do it is by having an active credit account. It could be a postpaid mobile plan, a credit card that you regularly use for daily expenses, or utility accounts. These can help you rebuild your credit history and show your lender that you can take on a financial commitment.

Regularly check your credit report

This should already be a given but it deserves a separate discussion — if you truly want to increase your credit score and boost your chances of getting approved for a home loan, you should start with regularly checking your credit report.

Monitoring your credit report once annually is free of charge. However, it is highly encouraged for you to do it several times a year to keep yourself updated on your file and to avoid any errors. Additional copies of your credit report will incur charges. To get a copy of your report, you reach out to national credit reporting bodies like Equifax, Ilion, and Experian.

Want to engage with a professional to help you with your home-loan application? Our experts got your back!

More Home Loan Guide