Credit Score 101
What credit score do I need for a home loan? Whatever your financial position, home loan Australia requires several quotas for you to be eligible for a mortgage. And one of the core requirements is a satisfactory credit score, which must be over a specific rating.
A healthy credit score is one proof that a borrower is financially capable and responsible to manage a home loan.
This guide is all about understanding your credit score, what rating is ideal to secure a mortgage, what will disqualify you, and what steps can prepare to improve your credit score if needed.
What is a Credit Score?
Credit score, or credit rating, is a numerical representation of a person’s accumulated borrowing and repayment history. Lenders and financial institutions look at your credit score to assess if you can repay debt responsibly.
Based on this number, plus other criteria, your lender can set the appropriate loan amount they can lend you and at what interest rate.
How Is My Credit Score Calculated?
Australian credit report agencies are the bodies that calculate credit scores, but they do not explain outright how credit rating calculations are done. Financial institutions prefer to keep this information to prevent people from manipulating the system. Hence, there are key criteria to determine what number your score falls under, but the exact algorithm is kept secret.
Calculating your credit score means looking at these factors:
Payment history. Your track record of making timely payments on loans, credit cards, store cards, and other credit accounts. Late payments or defaults could affect your credit score.
Length of credit history. This refers to the duration of your accounts, including the age of oldest account and average age of your credit accounts.
Credit use. How much your credit limit is and how much available credit is left is also examined.
Inquiries. Any loans or inquiries you have taken out, including personal loans, home loan, renovation, or guarantor for another person.
Stability. Banking systems also look at job and home life security. For example, how long you have lived at your current residence, and if you switch jobs frequently – clients who aren’t as stable could have a lower credit rating.
Asset Position. Banks assess if your reported assets and savings are consistent with your income, age, and background. So even if you’re at a high-income bracket but you don’t own assets, you may have a lower score.
What is the minimum credit score in Australia?
There is no magic number that automatically points to a home loan approval. Your credit rating could vary depending on how the credit scoring agency calculates your number.
Overall, the general consensus is that if the credit rating is out of 1,200, then any score above 853 is considered excellent, while any score above 661 is good. If you are scored out of 1,000, a credit rating of 690 upwards is excellent, while above 540 is good.
If your score is below 509, you may be considered high risk and would affect your chances of securing a home loan. You could opt for bad credit home loan products, but they usually come with higher interest rates.
Of course, having a high credit rating could mean more negotiating power when considering the interest rates that lenders can offer your mortgage. But credit score isn’t the only factor; there’s the official cash rate from the RBA, the lender’s loan product features, the loan amount, deposit, and overall trustworthiness as a borrower.
How do I find out what my credit score is?
There are free Credit Check services online which could give you a range of where you sit between 0-1000. These services will ask for certain information to calculate your score. You can also see what accounts are registered on your credit file, the type of credit products you’ve held recently, credit requests, and repayment history.
Why do I have low credit score even if I’ve never had loans or credit cards?
Not having debt isn’t an edge for creditworthiness; banks have to have a record of how you make repayments, how you manage credit accounts, and such in order to rate your credit score. Having zero loans means you simply haven’t demonstrated creditworthiness.
Can I make my credit score higher?
If you have an average credit score, or if you’re considered to have bad credit already, you are still perfectly capable of applying and getting approved for home loans – as long as you have the income and stability to manage repayments. Bad credit home loans (link) are designed for clients who are looking for a home loan but aren’t able to secure a standard mortgage application.
To help improve your credit score, or maintain it at a good range for a home loan application, here are a few strategies to focus on:
- Make it a point to pay bills on time, e.g., phone bills, rent, power, etc.
- Check on your credit report and if there are any errors or inaccuracies with your personal details, have them clarified right away.
- Prioritize paying off any outstanding credit accounts as quickly as possible.
- If you’re set on applying for a mortgage, consider using a guarantor to boost your chances of securing a home loan.
- Keep your credit card balance well below the limit.
- Avoid making several loan applications for credit at one time because once banks are made aware of several loans or credit card applications in a short span of time, this can impact your credit score negatively.
- Avoid bankruptcy.
Overall, don’t fret in case you have a lower score now. Your credit score isn’t static; you could always make big financial and lifestyle changes to improve your rating. Finding stable employment and housing, making timely payments on debts, and beginning to save or invest will achieve a turnaround in your credit score and capacity to apply for a home loan.
Can I apply for home loan with a poor credit score?
Yes, you can. As we’ve said, credit score is only one of many factors that lenders assess when looking at a loan application. There are specialized products that work around a bad credit home loan, especially if your financial history and other criteria are in the green.
Do keep in mind that applying for bad credit home loans may have certain implications, like the following:
- Lower loan-to-value ratio (LVR) for the home loan that will necessitate a deposit larger than the typical 20% of the property’s value.
- Lenders may also offer higher interest rates
- Additional or higher fees to both upfront and ongoing costs (e.g., application fees, legal fees)
Still have questions about your credit score?
Credit score is a major factor when banks review home loans. Ensuring your financial situation is in order before applying for a home loan can make your application more seamless.
If you have a less-than-typical credit rating, it’s best to seek advice from expert mortgage brokers.
Intellichoice is your reliable home loan Australia specialist team. We can walk you through the process of checking home loan requirements, finding customized mortgage products that can be best suited for you.
We can assist with pre-approval, credit score advice, and bad credit home loans. Simply get in touch with our loan specialists today to get started.
