If you’re applying for a home loan one of the first things any lender, including Nano, will want to know is what is your credit history and your current credit score. A responsible lender uses your credit history and score to assess your ability to service the loan and to avoid taking any unnecessary risk when making a decision to approve a home loan.
So, what do you need to know when it comes to your credit score and what do you need to watch out for.
Soft checks, hard checks – and self-checks, what’s the difference?
There are three major Credit Bureau companies operating in Australia: Experian, Equifax and Illion. A Credit Bureau’s reports can be ‘soft’ or ‘hard’. A hard enquiry appears on your credit report when a lender accesses your credit file in response to an application for a new loan, credit card or line of credit.
A soft inquiry also known as access seeker report is does not leave a record that an enquiry was made and is usually unrelated to lending you money. Checking your own score (which is well worth doing and can be accessed for free via ClearScore) is considered a ‘soft’ check. We’ve found the people who are totally across their personal credit score – and continually trying to improve their score – are the people most likely to secure a favourable decision with a lender.
Contrary to perception, applying for a home loan does not necessarily negatively impact your credit rating. You just need to understand the process and how your credit behaviour impacts your credit file and ultimately your credit score.
Don’t ‘put yourself out there’ too much – be selective
If you’re in the market for a home loan, it can be tempting to apply with several different lenders. That’s understandable; there are a lot of ‘carrots’ (cashback offers, special rates etc.) on offer. But if you’ve applied with too many financial service providers, it can create a “busy” credit file and raise red flags to potential lenders.
Every time you apply for credit, an enquiry is recorded on your credit file which “may” impact your credit score. Contributing factors on whether it impacts your score are, the type of credit (home loan, personal loan or credit card) you are applying for, how often, and which lenders you are applying with. Lodge too many applications too quickly, and your credit score “may” reduce as you’re giving the impression of being desperate for money – which is the opposite of what you want to convey!
If you are rejected for credit, it’s best to let the dust settle and wait a while before applying again.
Serious about your score? Here’s how to ramp it up further
If you’ve committed to getting your credit rating score in order, there are simple ways to improve it. The most obvious is to use your credit card judiciously. Use it often but use it well. By that we mean, don’t max it out, and make all of your payments on time – every time, even one month of late repayments will impact your credit history. If you have multiple credit cards but don’t use one or more of them, consider cancelling the unused ones. Lenders are required to consider your total credit limits when assessing your application, used or unused.
Kill those bills and repayments
Paying your bills and making repayments on time make up a huge portion of your credit score. If you’re in the habit of paying your bills late, or waiting for reminders, this will not report well on your credit file. Leaving bills or debts unpaid, to the point of debt collectors being engaged is not good credit behaviour and this will impact your ability to obtain credit in the future. If this sounds like you, it’s never too late to turn things around, but it will take time to improve your score.
Make sure you always pay your debts on time. Consider setting up direct debits or BPAY for any recurring bills or expenses – then you can ‘set and forget’. If you are late, at least make sure you pay within the 14-day grace period’ so as not to have your score affected.
Get clever about debt to get the loan you want
Sure, if you have a negative credit score, it will take time to build it back up, but it’s not all bad news. If you can demonstrate to a lender, you’ve turned a corner and are actively trying to redress the balance, they may look more favourably upon you.
So don’t give up! Just be consistently clever about how you manage your individual rating. Remember, these days credit reporting is much more comprehensive and contains positive information, not just the ‘negative stuff’. If you’re being truly responsible about paying bills and loans off on time etc, it will show, and will be taken into account by potential lenders.