Your credit file plays a major part when you apply for a home loan, but not everyone knows what their credit score is or what affects their score.
Your credit score is based on a range of information, such as repayment history, overdue debt as well as the number of credit enquiries you have made. Lenders use this information when determining your credit worthiness and the likelihood of you making your home loan repayments in the future.
If you have a low score, it could affect your ability to obtain a home loan, however, there are ways to improve your score and improve your chances of obtaining a home loan down the track. Listed below are the top 5 factors that affect your credit score.
Multiple credit enquiries
You may not realise that shopping around for credit could have a negative impact on your credit report. Each time you submit a loan or credit application to a lender, it will be noted as an enquiry on your credit report. Lenders don’t know if this enquiry resulted in you taking out the loan, changing your mind or being declined. Lots of credit enquiries could be an indication that you are in financial trouble and result in the lender being more cautious about your application.
How to fix: Before applying for credit, whether it be for a home loan, car loan, credit card or interest free deal, research different lenders and only submit an application to a lender you intend to go with. If you have lots of credit enquiries on your credit file, the best thing to do is to not make any further enquiries for an extended period to allow your most recent history to be less cluttered and some of the older enquiries to drop off (usually after 5 years). If you are serious about getting a competitive home loan, it is best to avoid applying for any additional type of credit until after the home loan has settled.
Too much debt
The more financial commitments and personal debt you have, the greater impact it will have on your loan application. These will be listed on your credit report as ongoing commitments so there is no hiding the fact that you have them. Credit cards can greatly affect your borrowing ability and the more credit cards you have and the larger the limit, the more it can restrict your borrowing capacity. Even if you have $0 owing on the cards, the lender will still assess your application using the credit card limits.
Other ongoing commitments such as phone contracts and gym memberships could also impact the cash available to make home loan repayments.
How to fix: If you have a number of credit cards with large limits, the best thing you can do is pay off as much owing as you can, reduce the limit and if you have credit cards that you are not using, cancel them.
Before applying for a home loan, seriously look at your ongoing commitments and work out if you can cut them back at all. If not keep this in mind as a possible course of action if you are not able to borrow the amount you would like to due to repayment affordability with all these included.
Not paying bills on time
An overdue bill that is at least $150 can be listed on your credit report as a default once it is 60 days or more overdue. Repayment history is being brought into credit reports gradually so before long lenders will be able to see the repayment history on your credit contracts like credit cards, personal loans and home loans. If you have defaults or your repayment history on your credit report shows you are always late, it could impact your chances of getting a home loan.
How to fix: The only way to fix this is to pay your bills, credit cards, personal loan and home loan repayments on time, every month. Set a reminder on your phone the day before it is due or use direct debit and schedule automatic repayments. This way, you won't have to worry trying to remember when they are due.
Not fixing errors
Errors can sometimes appear on your credit report. We have seen unauthorised enquiries, incorrectly listed defaults and wrong details of enquiries on credit reports. At the end of the day it is your responsibility to get these amended or removed. If you don't, it could negatively affect your credit score and could impact your chances of obtaining a home loan or other credit in the future.
How to fix: Check your credit report every 12 months so that you are up to date with what is listed and you can fix any errors straight away. You do this by contacting the company that made the listing and dispute the listing and if incorrect get them to remove or change it.
Your credit report plays a major part when applying for a home loan. If you have issues on your credit report don’t despair, there are home loan options available where, instead of relying purely on your credit score your unique situation is factored in. If you would like to discuss your options, our Lending Specialists can help. Give them a call on 13 72 62 or leave your details here and they will contact you.