Your credit file is like your financial report card while your credit score summarises the information on your file into a number that helps lenders determine your creditworthiness.
What is a good credit score?
Using the information on your credit file, credit bureaus such as Equifax calculate your credit score based on a pre-determined scoring model. A higher credit score signifies you are more creditworthy, while a lower credit score signifies a poor credit rating that could potentially derail your mortgage application.
You can ask for a free credit report from credit bureaus such as Equifax and Experian. Both the bureaus follow a different scoring model. In general, an Equifax score over 622 and an Experian credit score over 625 is considered good.
Here’s a comprehensive guide to understanding your credit score better.
How to improve your credit score?
Your credit score is one of the important factors that decide the fate of your home loan application. A good credit score not only increases your chances of approval but also enables you to negotiate a better rate on your home loan. Thus, it makes sense to boost your credit score before you apply for a home loan.
Here are some handy tips on how to improve your credit score:
Review your credit file regularly – Lenders view your credit file to assess your financial behaviour. Thus, it is imperative to review your credit file periodically to ensure that the information listed on it is correct. You can request a copy of your credit file from all the credit agencies, free of cost, once every 12 months.
Did you know that a study conducted in 2004 revealed that 30 percent of credit files are likely to contain errors?
Black spots on your credit file bring down your credit score and remain on your file for 5 to 7 years. If you spot any errors on your file, it is important to dispute them to have them removed from your file immediately. You could also contact a reputed credit repair agency to negotiate with the creditors on your behalf.
Limit credit enquiries – Each time you apply for a home loan, lenders pull out your credit to determine your creditworthiness. This is known as a hard pull, and each hard pull is listed on your credit file. Thus, shopping around for a home loan could adversely affect your credit score if you make too many home loan applications within a short span of time. Fortunately, the FICO model recognises that most mortgage seekers are only after better rates, allowing you to shop for the same type of credit within a period of 45 days. This window, however, was limited to 14 days in the older FICO model. Thus, if you are looking for a loan, it is advisable to keep your shopping period limited to 14 days.
In case you have too many enquiries in a period, it is best to wait it out. By lying low for about four months or so, you’d see your credit score improve gradually.
Pay your bills on time – It is essential to pay your credit card and utility bills on time to keep your credit file in top shape. Remember, a missed payment stays on your file for up to 5 years and reflects irresponsible financial behaviour.
It is also a good idea to repay any outstanding payments. While this won’t remove the listing from your file, it would be marked as paid, improving your chances of obtaining credit in the future.
Reduce your credit limits – A high credit limit does not help your credit score. For example, if the credit limit on your card is $10,000, lenders will take into account the full amount while calculating your debts even if you owe $2,000 on the card. Thus, it makes sense to reduce your credit limit before you apply for a home loan.
Don’t change houses too often – Errors can crop up in your credit file when you change your address. In case you move your residence, don’t forget to provide your new address to your lender, credit card provider and other service providers so that your bills are redirected to your new address. Besides, a stable job and income also improve your chances of obtaining credit.
Lenders offer their best deals to customers with a high credit score and clean financial history. Thus, maintaining a good credit score gives you more power as a borrower to negotiate a better rate on your home loan, saving more money in the process. If you plan to apply for a mortgage in the near future, we suggest that you pull out your credit file and follow the simple tips shared in this article to boost your credit score.
HashChing is Australia’s first online mortgage marketplace that allows users to compare broker-negotiated mortgage rates from over 60 lenders across Australia. Users can also post their home loan queries online to have them resolved by experts in a transparent manner, free of cost.
By Vidhu Bajaj,
HashChing Content Writer