Credit Score

Why Your Credit Matters

When you apply for a loan, your lender has to evaluate your financial lifestyle to decide if you’re likely to repay your mortgage. Your credit is a major part of that assessment. In fact, your credit score can make or break your home loan application. Which means that anything you can do to possibly improve your credit score is useful, as this can up your chances of qualifying for the loan you want.

Credit File vs. Credit Score

Your credit file and your credit score aren’t the same thing. Your credit file is your history with all creditors. It includes things like late payments, defaults, and the number of times you’ve applied for credit as well as the type of credit you apply for. Your credit file will contain your Equifax Score, which is different to the credit score the bank generates when assessing your loan application.

Your credit score is what your lender uses to determine if you’re eligible for credit. Your credit history – and even your Equifax Score – may also be factored in. However, the unique scoring system your lender uses will focus on both your history as a borrower and on the information provided as part of your loan application.

What Goes into a Credit Score?

Sure, your credit score is just a number, and one that you won’t even see. But this doesn’t mean it’s not one of the most critical components of your mortgage application.

This is what credit issuers use to get an idea of your creditworthiness. It isn’t just used by mortgage lenders either – when you apply for a personal loan or a credit card, or even a mobile phone contract, the issuer will use a computer-generated score to determine if your credit is good enough or not.

Depending on that score, you’ll either be declined or, if you meet the rest of the lender’s criteria, they’ll approve you for credit. The lender will use the information you provide on your application, as well as other data related to your credit, to generate your score. The bank isn’t going to share your score with you. All you’ll find out is whether you got a pass or a fail.

• A score that results in a fail will almost always lead to a declined application. Even if you are in an excellent financial position and could easily service your loan, if there are issues with your credit, you won’t get approved.
• If your score passes, your lender has the green light to approve your application as long as you’ve met the rest of the bank’s lending requirements.
• It’s also possible the scoring system won’t be able to generate an accurate score, or you may be too close to the margin between a pass and a fail. In this case, the bank will have your application assessed by a credit manager. This way, you’ll have a human determine if you pass or fail, instead of a computer.

How Do Lenders Calculate Your Credit Score?

Lenders will use a range of factors to generate your score. As you may have guessed, not every lender will give you the same score. Some are more lenient with their credit scoring policy whilst others are known for having very high standards.

There’s no way to find out exactly what factors a lender uses in their scoring algorithms, or which factors carry the most weight. Credit issuers purposely withhold this information because they don’t want people to take advantage of that knowledge, gaming the system just to get approved.

However, the general factors for credit scoring are well-known. Not all lenders use every one of these factors. There are also other considerations that go into calculating your score but the elements recorded below are the fundamental factors you should know about:

Loan to Value Ratio

One of the most important aspects of your loan application is the Loan to Value Ratio (LVR). It impacts what you’ll pay in Lender’s Mortgage Insurance, what other criteria you need to meet to qualify, and which lenders are likely to approve your application at all.

The more you have to borrow in relation to the value of your property, the greater the risk you are to lenders. So, even if you have a clean credit file and a high income, you still may struggle to qualify for a 95% LVR or 90% LVR loan, depending on other factors. Generally, applying for an 85% LVR loan, or as low as 80% LVR with some banks, will make it easier to qualify. If you’re applying for a high LVR loan, your other credit factors will need to be almost impeccable in order to pass the bank’s credit scoring.

Loan Size

Loan size is another important factor. Bigger loans are a bigger risk for banks. Not only are they lending more money, but they also may also have a harder time reselling a $1.5 million property than they would a $500k one in the case of a default.

Generally, loans in excess of $1 million can make it harder to get a pass result from your credit score.

Serviceability

How easily you can manage your loan repayments matters to your lender. Your ability to repay your loan is known as loan serviceability, or your borrowing capacity. Lenders will look at your financial obligations in relation to the money you have coming in from your income.

The bank will consider your income, the number of dependents you have, location, unsecured debt, and your credit card limits, to determine what you can afford.

Assets and Liabilities

Lenders may look at your assets and liabilities in different ways.

• They may look at your ratio of assets to your liabilities – if your total debt outweighs your assets, you’ll probably fail the lender’s credit scoring.
• Lenders consider your assets in relation to your age and your income – if you’re older, they’ll expect you to have more assets than if you are in your 20s.
• In general, a high number of unsecured debts will make it hard to qualify.
• On the flipside, a high amount of savings will give your credit score a boost.

Type of Loan

Lenders know that certain types of loans come with more risk than others. If you are acquiring a loan to purchase a home, this shouldn’t bring down your credit score. A loan for an investment property, a refinancing product, a debt consolidation loan, or a loan for business purposes, can all bring down your credit score.

Work and Home Stability

Even your work history and living situation can impact your ability to get a loan.

Lenders will look at how long you’ve been at your current job and in your current location. Having changed jobs or changing your residence in the past six months can bring down your credit score.

Bank History

If you’re applying with your bank for a home loan, they’ll look at all your past account history when calculating your score. Things like going overdrawn on your bank account or making a late payment on your credit card, especially if it’s occurred in the past 12 months, can lead to a declined application. This information isn’t usually shared between lenders, and so bank account infractions that took place several years ago will not usually harm your application.

Equifax Score

Lenders usually incorporate your Equifax Score into their calculations for the computer-generated credit score they create for you. It’s worth keeping on top of this score, which, unlike your lender generated score, you do have the right to see.

What’s the Difference Between Your Equifax Score and Your Lender’s Credit Score?

Your Equifax Score is the score that’s tied to your credit file. It’s a national score that looks at where you stand as a borrower when compared to other Australians. Your Equifax Score is a number, usually ranging from 200 to 900 although the full range goes from -200 to 1200. Your lender can show you your Equifax Score, or you can contact Equifax to find out what it is.

Your credit score for your mortgage application is something each lender will determine independently. This is based on the information relating to your loan application and may or may not be factored into your Equifax Score.

What’s a Good Equifax Score?

The average score is 550. Anything from 600 to 700 is considered ‘good’ and a score above 700 is considered ‘excellent.’ As many lenders do use this score, taking steps to clean up your credit file to help improve your score may help you qualify for a loan.

The Equifax Score includes:

• The number of loans you’ve had in the past 5 years – the more credit enquiries you have, the harder it is to qualify for a loan. This is why it’s not a good idea to apply with multiple lenders all at once.
• Defaults – any accounts that are over 60 days past due will come up as a negative on your credit file.
• Court writs and court judgements
• Bankruptcy – if you are going through bankruptcy or enter into a Part 9 agreement, your score will go down to 0.
• The type of credit provider you apply with and the type of credit accounts or loans you have open will impact your score.
• Your personal history, including your residential and employment history.

Before applying for a loan, you can check your credit file and tie up any loose ends to ensure your Equifax Score is as high as possible. If there are any mistakes on your credit file, you can ask Equifax to fix them. You’ll also want to pay any defaults and ensure all your bills are paid on time.

If you’re getting ready to apply for a mortgage, try not to apply for other types of credit, which will mean another enquiry into your credit file. It’s also better if you don’t move your address or change employers – both your Equifax Score and your lender’s credit scoring can be brought down by these lifestyle changes.

You Need a Good Credit Score to Get a Home Loan

The biggest reason people don’t qualify for a home loan is their credit score. If you don’t meet the lender’s credit criteria, your credit score will be too low, resulting in a fail. This can be frustrating as the lender may not be able to tell you why exactly you failed or what exactly you need to do to improve your score.

Once your application is denied, you may want to try to apply with another lender who’s known for having a more flexible credit scoring system. This actually isn’t a good idea in most cases. Because you just applied for a mortgage, you’ll have a recent credit enquiry on your credit file, which can bring your Equifax Score down as well as your credit score. This increases the chances of another denied application.

Don’t hesitate to call and talk to one of our home loan specialists if you’re worried about your credit score. Call (07) 3146 5732 or contact us here. We are familiar with which lenders are more flexible when it comes to credit scoring and which ones are more difficult to qualify with.

Common Reasons for a Failed Credit Score

You can end up with a low credit score for something as simple as too many recent enquiries on your credit file, or not having 5% genuine saving. Surprisingly, one of the most common reasons for failure is changing your address or employment. Taking on a new job opportunity may be great for your career but it’s not necessarily a good thing for your home loan application, as it signifies a lack of stability.

Other major reasons for failure include:

• Defaults on other debts or overdrawn accounts
• Late payments for other credit facilities
• A poor credit history

Ways to Improve Your Credit Score

You can’t make any big changes to your credit score, at least not in the short term. Factors like the type of loan you’re applying for aren’t flexible. And while you can work on things like your assets and liabilities, it can take time to increase your assets and to pay off your other debts.

Still, it’s a good idea to work on your credit if you are thinking of applying for a loan, and to be aware of how certain factors could impact your ability to qualify. To help your score, here are some things you can do:

• Don’t change jobs or your residential address right before applying for a loan.
• Make all payments on your credit cards and other accounts on time – even one late payment can become a big problem.
• Make sure you don’t overdraw on any account.
• Pay off as many accounts as you can – if you can pay off any smaller credit card balances before applying, do it.
• Consider closing one or two credit cards – if you have access to a lot of credit, some lenders will view this as an over-reliance on credit card debt.
• Check your credit file to see if you have any defaults and pay them in full.
• Make regular deposits into your savings account – this will help you build up a larger deposit and is a way to show you’re good at managing your personal finances.

How to Get Around Credit Scoring and Still Qualify

Not all lenders will focus on credit scoring. There are some who are more interested in your income and borrowing capacity than how diligently you’ve been repaying your other accounts. Where one bank could deny your application because you have two or three credit enquiries in the past 12 months, or for a late payment on a credit card account, another may overlook these issues because they prioritise other factors like income stability and genuine savings.

If your high-paying profession, substantial amount of assets, or large deposit, puts you in line to be considered 'high value' borrower, we can help you find lenders who are likely to approve your application, even without a stellar credit score. Even if you worry that you do not fit this criteria, our team can still provide the assistance you need.

Call us today to learn more about how you can improve your credit and find out what different lenders are interested in when it comes to assessing your creditworthiness. We can even tell you which lenders don’t use credit scoring at all, and what it takes to qualify for a mortgage with them. Fill out our online enquiry form, or call (07) 3146 5732 today to talk with one of our specialists.