Not unlike your academic scorecard, your credit file gives out your credit score that lets lenders know how good you have been financially and how much risk can they afford to take on you.
Your credit score sums up your financial history; and small blemishes (such as forgetting a utility payment) can tarnish your file for upto 5 years, bringing down your credit score and consequently, your chances of getting approved for a home loan.
So if you are planning to buy your home or invest in property in Australia, pull out your credit report and look it through for any discrepancies or oversights to increase your chances of loan approval.
So, what’s a credit score?
In case you have a credit card or have paid a utility bill ever, you will have a credit file that you must access before applying for a loan. This credit file contains a record of your financial dealings including your personal information, the number of credit cards you hold, any outstanding debts, missed payments, past debts, court judgements, credit enquiries made by you and the creditors who have requested your credit file. Undoubtedly, a valuable source for lenders to judge your creditworthiness.
Credit scores are determined on the basis of information provided by you in your application and that mentioned in your credit file, some important points being:
1. The list of lenders you have approached for credit
2. Number of creditors who requested your credit file
3. Your repayment history and defaults.
4. Missed utility payments (even as small as a telephone bill)
Apart from reviewing your credit score, lenders also review your credit file as a whole to determine whether they would lend to you or not. Generally speaking, with a credit score over 740, lenders assume you would not fall into any adverse financial situation in the near future and with other things in place, would be happy to lend to you.
But who is collecting this information?
In Australia, Experian, Equifax, Callcredit and Veda are the main credit reporting agencies and your credit file may exist with one, some or all of them. Default in payments stay on your file for up to 5 years while missed repayments and credit card payments stay up to 2 years.
Does a tarnished credit file affect my borrowing capacity?
Yes, indeed! Even a single black spot can cost you an arm and a leg, so it is worthwhile to pull out your credit report and look for discrepancies that can be fixed. In case you can explain the defaults on your file, an experienced broker can help you access home loan. Read here to know more about loans with bad credit.
Do you know that 30% people who pulled out their credit reports, found mistakes in it according to a research report published in the year 2013 by Office of the Australian Information Commissioner?
Before you apply for a loan, request a copy of your credit report from credit reporting agencies, free of cost. In case you find any discrepancies, contact the concerned agency and ask them to rectify it. It may help to consult a lawyer for help.
Now that you know all about credit scores, if you are planning to buy a property in the near future, here are some easy tips to improve your credit score to ease your home loan approval process:
1. Don’t move your house too often. Having the same address for a year can boost up your score.
2. Being on the electoral roll helps.
3. Maintain good credit history – remember to make even the smallest payments on time.
4. Give up the extra credit cards. Click here to know how too many credit cards can affect your borrowing capacity.
5. Be in good company. Yep, having a joint bank account or a joint mortgage with a person with bad credit history can affect your credit score adversely.
Financing your house can be difficult, unless you are guided right. Compare pre-negotiated home loan deals on HashChing for the lowest rates or get in touch with our expert brokers to have your queries answered online, for free.
By Vidhu Bajaj