All about credit scores
Shocking things that affect your credit score can include changing address too frequently, not updating the information and not informing the bureau of an address change! Most people have to borrow to purchase real estate so checking how you stack up is the first step in your borrowing journey. As interest rates climb credit is harder to get and lenders are more discerning about who they will lend to.
Your credit repayment history
There are seven pieces of information that are recorded on your credit file that you should know about. Many of these judgments are not even considered by consumers and frankly, it is unfair that these points are not well known!
- Bad habits
Knowledge is power and avoiding harmful habits can greatly improve your credit rating. The following will affect your score:
- missing credit or loan repayments;
- paying bills late, missing payments, or unpaid bills;
- making too many loan applications for credit;
- missing Afterpay or other ‘Buy Now Pay Later payments;
- payday loans;
- applying for balance transfers frequently;
- bankruptcy listing or court judgments;
- forgetting to update your contact details;
- not fixing errors on your credit report and
- not regularly checking your credit report.
- Having a relationship with the bank
If you even miss one or two payments perhaps in the last 12 months, may be enough to result in your loan being declined.
- Stable living
If you have lived at your current address for less than six months, or have worked in your current job for less than six months, this adversely affects your credit score.
- Asset and liabilities position
Having a saving record or a history of maying liabilities on time is very valuable. Clearly being a high-income earner with a considerable amount of assets is also considered favourably. Conversely, few significant assets, more debts than savings or no savings, a delinquent payment record or a very lower income results in a poor credit score.
- Loan-to-value ratio (LVR)
The Loan to Value Ratio (LVR) is the amount of your loan compared to the value of your property. LVR is calculated by dividing the amount of the loan by the value of the property. For example, if the property is worth $200,000 and you have a deposit of $40,000, the LVR will be 80%. ($200,000 -$40,000) ÷ $200,000 = 80%.
Borrowing more than 90% LVR requires a strong financial position to pass the bank’s credit score.
- Loan size and purpose
Larger loan sizes are typically higher risk. Whilst having a high loan amount may not hurt your credit, it could raise your debt-to-income ratio and lead to denied loan applications. In the current real estate markets where many people are borrowing over $1,000,000, a larger deposit would be required.
Common loan purposes are ranked from the lowest to the highest risk as follows:
- purchasing a home;
- purchasing an investment property;
- business purposes;
- consolidating debt and
- undisclosed purposes.
- Borrowing power
Banks provide mortgage calculators that give an indication of borrowing power; however, the calculator does not include all the variables. Mortgage brokers are able to assist borrowers with how lenders will assess them. Indeed, brokers can outline your chances by asking you all the questions banks want answered for. Importantly, your information isn’t on record – well worth a trip to see a broker.
Some information is unknown and seemingly unfair
Frankly, some of this record-keeping seems unfair, for example ‘stable living. Some people like to move, some people need to move for work and some people rent and have no choice in the moving decision. Also, the missed bills can have a reasonable explanation. For example, two brothers may buy a house together – both names of the mortgage – but the brother that is ensuring the mortgage payment misses the due date and doesn’t inform the other brother. Months later the diligent brother finds out his credit score is impaired.
Most people would not think to update their contact details at the credit score bureau. Nor would people know that not fixing errors on your credit report is problematic. Given people don’t even think about their credit score is highly unlikely they are regularly checking their credit report and updating it!
Large organisations seemingly have every protection that can be afforded so it is important you know how to play their game.
The major credit bureaus
There are three major credit bureaus in Australia, each calculates scores differently. Compare your own credit score to find out where you stand.
Illion: The overall range is 0-1000 where 0-299 is low, 300-499 is fair, 500-699 is average, 700-799 is very good, and 800-1000 is excellent.
Experian: The overall range is 0-1000 where 0-509 is low, 510-621 is fair, 622-725 is average, 726-832 is very good, and 833-1200 is excellent.
Equifax: The overall range is 0-1200 where 0-549 is low, 550-624 is fair, 625-699 is average, 700-799 is very good, and 800-1000 is excellent.
Getting a mortgage with a credit score lower than 550 in Australia
It is possible to get a loan with a bad credit score but it is generally more expensive. The big banks are unlikely to consider your application, however, there are alternatives. Even with bad credit that is as low as the 450-550 range, there are bad credit mortgage options. More than 150 home loan lenders in Australia – both non-conforming and specialist lenders – specifically cater to consumers who don’t quite meet the threshold for a standard home mortgage.
The application procedures are similar in that you have a deposit, obtain a mortgage, and then make regular repayments on the loan’s principal and interest. Traditional clean credit lenders generally do not proceed with an application if there are late payments on a credit card, a credit default, bankruptcy, or other delinquencies. Traditional lenders use a potential borrower’s current credit score for evaluation. Delinquencies a lender finds on a credit history report indicate that the borrower is at a higher risk of missing a payment or defaulting on the mortgage.
Bad credit mortgage
Clearly, there will be higher hurdles to jump when your credit is not optimum these include;
- Lower loan-to-value ratio (LVR) – the LVR determines how much of a deposit you’ll need as a down payment for a mortgage. A bad credit home loan means borrowers will need to make a deposit larger than the typical 20% of the home’s value.
- Higher fees – a variety of up-front and ongoing fees accompany any sort of mortgage, but a bad credit home loan will typically have even higher fees than normal. This may cover application fees, valuation fees, conveyancing fees, or even legal fees.
- Higher interest rate – in addition to paying larger fees, borrowers with poor credit scores may also have to incur larger interest rates.
Repairing your credit score
Credit scores can improve over time by paying on time. Further, you can refinance with a big bank at a cheaper rate once the credit score is improved.
All significant institutions operate using standard distribution curves. Obviously, borrowers are all different but lenders need a benchmark to work from. Outlined is what lenders see as problematic but borrowers don’t with homogenous credit histories. So, knowledge is power and outlined is what you need to know to satisfy bank general standards.