It’s just a number, but it can be the difference between being able to buy a house or not.
A credit score, sometimes referred to as a credit rating, is used by lenders as a guide for how responsible a person is with money and whether they qualify for a home loan. In Australia, it’s usually a rank between 0 and 1200, depending on the credit agency.
It’s based on a person’s history of paying off loans and bills, as well as how often they’ve applied for credit. It takes into account all credit cards, whether there is money owed on them or not, as well as other debts.
What is a good credit score?
Dominic Beattie, editor at www.savings.com.au, an everyday finance website, explains that different lenders have different standards for a credit score when buying a house. That means there’s no one set score required to get a mortgage, but there is an average which lenders look for.
“A score between 500 to 700 is considered average in Australia. While someone with a below-average credit score may struggle to be approved for a home loan from many lenders, some smaller specialist lenders may be willing to take a chance on them,” Beattie says.
A credit score above 700 is considered “pretty good”, while anything over 800 is “excellent” and is in the top 20% of borrowers.
Between states, the approach to credit scores is similar, but it’s generally riskier for lenders to provide loans in states experiencing widespread house price falls, compared to those with rises, Beattie says.
“It’s fair to assume a lender may require a prospective borrower purchasing in a state where house prices are falling, such as Western Australia, to have a higher credit score than other states like New South Wales and Victoria,” he says.
How does your credit score affect your interest rate?
Beattie says the higher the credit score a borrower has, the better the chances are of getting a lower interest rate.
He says those with credit scores in the good-to-excellent range may find themselves eligible for market-leading interest rates, while those with below-average scores may have to resort to higher rates.
“It’s a sad reality, but those who are struggling financially often pay the highest interest rates, because they often have poorer credit scores, which can further entrench their struggles with debt.”
Can you buy a house with bad credit?
Even with a bad credit score, it’s still possible to be approved for a home loan to buy a property, Beattie says.
“There are specialist lenders in Australia that cater to borrowers that can’t get approval from mainstream lenders because of their bad credit scores, although such lenders typically charge higher interest rates to account for the higher risk of default posed by these borrowers,” he says.
Beattie says aspiring property buyers with bad credit scores can boost their chances if a family member with a good credit score, such as a parent, is willing to act as guarantor for the loan.
Can you fix your credit score?
With the recent introduction of comprehensive credit reporting – also known as “positive credit reporting” – in Australia, it should be easier than ever for Australians to improve their credit scores, Beattie says.
“So, building up a consistent history of positive financial events, without any negative slip-ups, should see your credit score improve over time,” he says.
Ways to improve your credit score
If you find yourself with a below-average score never fear, there are ways to improve it. Things to do to get your number higher are:
- Pay bills on time
- Pay down existing debt
- Don’t apply for new credit
What impacts your credit score?
We all have slip-ups from time to time and money can get tight. To avoid your credit score dropping you should try to avoid negative financial events include things like:
- Paying bills late
- Applying for new credit
How can you check your score?
Australians can check their credit scores free online via sites.
CLICK HERE for more information.