So what is a credit score?
Your credit ‘score’ is a number given to you by a credit agency (there’s three in Australia) between 0 and 1000 or 0 and 1200, depending on which agency you’re using. The reason they have different scales is because while each agency uses pretty much the same data, the way they aggregate and analyse this data is different.
The credit score you have at any given time is a score of all your lending history including credit card debts and loans, as well as personal history such as your employment and living situations. This means that your score is fluctuating all the time due to small (or big) changes in your life that affect your potential lending power.
What is a credit rating?
Once you’ve decided to approach a financial institution about a home loan, the lender will take a look at your application and then assign you a credit ‘rating’. In Australia, this will be a letter grade from A to D or a numeric scale from 1 to 5. This rating determines whether you’re a high or low risk borrower.
The bank or lender you apply for your home loan with could be the difference between your application succeeding or failing, as they each have their own assessment programs. Generally speaking, if you’re given a rating of 5, your application will fail. 4, you will likely be declined, unless you have a good reason. A rating of 3 and your application will be assessed on its merits, and if you score 1-2 you’re considered a good customer.
It’s important that you don’t apply for loans without a good understanding of your credit health, as failed or declined applications can have a negative impact on your file which will affect your creditworthiness in the future.
What information is used to determine my credit rating?
When lenders are determining a credit rating they look at your credit score, but they also take into account a range of different factors including:
- The type of loan you’re applying for – a home loan is higher risk than an investment property loan, for example.
- How long have you been at your current job and home? People that move a lot and change jobs often are deemed to be higher risk, because they don’t provide the stable image that lenders like to see.
- How many loans you’ve applied for in the recent past – an individual with a lot of credit applications on their file will be looked at as being high risk.
- How much you’re looking to borrow.
- Do you have any savings? Having little to no savings will cause lenders to classify you as a high risk applicant.
Other factors such as having a healthy bank account with the lender you’re applying with, and if you’re applying alone or with a partner or guarantor, will affect your credit rating in Australia.
What if I have a bad credit rating?
If you’ve applied for a home loan and been rejected because of a bad credit score or rating, there are still options available to you. While most traditional banks will decline a bad or low credit score application almost immediately, there are many modern lenders that will take into account the reasons for bad credit and may grant you a loan.
It’s important to always do your own research or speak to a professional who can guide you down the right path.
What if I have no credit rating?
Having no credit history doesn’t look great either, because it means lenders have no information to classify you. This means you’re a high risk customer because they don’t know if you’re capable of paying back owing funds.
You can fix this by taking out a credit card approximately six months before you want to apply for a loan – and make sure you pay it off! This will show you’re a responsible customer that can pay off their debts in time.
Credit score vs. credit rating
Your credit rating is the grade (A-D or 1-5) assigned to you by a lender’s application assessment program that indicates the strength and risk of your application. It could be the difference between your application being successful, or not.
The credit score is a number (0-1000 or 0-1200) determined by credit agencies in Australia such as Equifax, Experian, and Illion that is a summary or reflection of your credit file. It changes often and you can take small easy steps to improve it before lodging a home loan application.
There’s a lot to take in when applying for a loan, so to save yourself from potential black marks on your credit file, you should check your credit file and ensure you’re a creditworthy applicant before lodging any application.
Try to increase your savings, keep a secure job and pay down any debts and you’ll be on the right track to purchasing your new property!
Remember WOW Homes is always here to answer any questions you may have and provide more personalised home loan advice too.