What is A Credit Score? | How To Improve It

If you’re considering buying a home or applying for a mortgage, understanding the importance of your credit score is crucial. Your credit score highly impacts your chances of qualifying for a home loan and the interest rate you’ll be offered.

This guide explores the world of credit scores and their impact on your ability to secure a mortgage. It will explore the factors influencing your credit score and explain how lenders use this information to evaluate your creditworthiness.

The Magic Number: What is a Credit Score?

A credit score, or ‘credit rating’, is a numerical representation of your financial trustworthiness. It’s calculated based on your credit history, past and present loans, repayment history, and any defaults or bankruptcies. Essentially, it measures how reliable you are in repaying your debts. 

Credit scores range from 0 to 1200. Lenders perceive you as more creditworthy when your score is higher.

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Why is Your Credit Score Crucial for Your Home Loan?

Your credit score for a home loan holds immense significance. Lenders see it as a reflection of your financial responsibility. 

A good credit score could determine whether your home loan is approved or rejected. Having a higher score can increase your chances of obtaining lower interest rates and more favourable loan conditions, potentially leading to significant savings throughout your loan.

Deciphering Your Credit Score: What Does It Mean?

Australia has three main credit reporting agencies: Experian, Equifax, and Illion. Each of these agencies uses a different scale to measure credit scores:

  • Experian: 0 – 1,000
  • Equifax: 0 – 1,200
  • Illion: 0 – 1,000

Despite the different scales, the breakdown for understanding your score is relatively similar across all three:

Experian Score:

  • Below average to average (0-549): It’s likely you have negative events on your credit report.
  • Fair (550-624): You’re a bit below the population average, and lenders may consider you a higher risk.
  • Good (625-699): You’re likely to be considered average by lenders.
  • Very good (700-799): You’re less likely to experience a negative event on your credit report in the next 12 months.
  • Excellent (800-1,000): You’re far less likely to have a negative event (like a default) recorded on your credit report in the next 12 months.

Equifax Score:

  • Below average (0-509): You’re likely to have adverse events on your credit file.
  • Average (510-621): You’re likely to have an adverse event in the next year.
  • Good (622-725): You’re less likely to experience an adverse event in the next year.
  • Very good (726-832): You’re unlikely to have an adverse event in the next year.
  • Excellent (833-1,200): You’re highly unlikely to experience an adverse event in the next 12 months.

Ilion Score:

  • Below average (0-299): You have a high risk of an adverse event in the next 12 months.
  • Average (300-499): You have a medium to high risk of an adverse event in the next year.
  • Good (500-699): You have a reduced risk of an adverse event in the next 12 months.
  • Very good (700-799): You have a low risk of an adverse event in the next year.
  • Excellent (800-1,000): You have a minimal risk of an adverse event in the next 12 months.

While each agency calculates your credit score slightly differently, they all consider similar factors, including:

  • Your personal details, such as age and where you live.
  • The type of credit providers you have used (e.g., bank, utility company).
  • The amount of credit you have borrowed.
  • The number of credit applications and inquiries you have made.
  • Any unpaid or overdue loans or credit.
  • Any bankruptcy or insolvency issues related to you.
  • Any court judgments against you.

To improve your credit score, you should focus on paying your bills and loans on time, try not to apply for credit too often, check your credit report regularly for mistakes, and maintain a stable residence and employment situation.

How Lenders Use Credit Score To Evaluate Your Creditworthiness

Lenders use credit scores as one of the key factors to evaluate an individual’s creditworthiness. Here’s how lenders typically use credit scores in Australia:

    • Credit Reporting Agencies: Lenders in Australia rely on credit reporting agencies such as Equifax, Experian, and Illion to obtain individuals’ credit reports and credit scores. These agencies collect and maintain credit-related information about individuals, including their credit history, payment behaviour, outstanding debts, and defaults.
    • Credit Scoring Models: Credit reporting agencies use proprietary credit scoring models to calculate credit scores based on the information in an individual’s credit report. The most commonly used credit scoring model is the Equifax Score, which ranges from 0 to 1,200, with a higher score indicating better creditworthiness.
    • Credit History Assessment: Lenders evaluate an individual’s credit history by reviewing their credit report, which includes information on credit accounts, payment history, credit inquiries, and any defaults or bankruptcies. They assess factors such as the number of credit accounts, the length of credit history, and the timeliness of payments.
    • Risk Assessment: Lenders use credit scores to assess an individual’s lending risk. A higher credit score suggests a lower risk of default, while a lower credit score may indicate a higher risk. Lenders typically set their credit score thresholds to determine whether to approve a loan or credit application.
    • Interest Rates and Loan Terms: Lenders may use credit scores to determine the interest rate and loan terms offered to a borrower. Those with higher credit scores are more likely to qualify for lower interest rates and more favourable loan conditions, while those with lower scores may face higher interest rates or stricter terms.
    • Decision Making: Lenders consider various factors, including income, employment history, and debt-to-income ratio, when evaluating loan applications. Their goal is to evaluate the overall creditworthiness of individuals and determine their likelihood of repaying the loan or credit promptly.

How To Improve Your Credit Score For A Home Loan

Improving your credit score isn’t an overnight process, but it’s certainly possible with consistency and patience. Here are some steps you can take:

  • Regularly Check Your Credit Report: Start by obtaining a copy of your credit report from reputable credit reporting agencies, such as Equifax, Experian, or Illion. Review your report thoroughly to ensure accuracy and identify any errors or fraudulent activities. Dispute any inaccuracies promptly to have them corrected, as these errors can impact your credit score.
  • Pay Your Bills on Time: One of the most crucial factors in improving your credit score is maintaining a consistent track record of timely bill payments. Paying your bills late can substantially negatively impact your credit score. To avoid this, consider setting up reminders or automatic payments to ensure you pay your bills by their due dates. Establishing a history of on-time payments demonstrates financial responsibility and positively impacts your creditworthiness.
  • Limit Loan and Credit Card Applications: Each time you apply for a new loan or credit card, it generates a hard inquiry on your credit report. Too many hard inquiries within a short period can negatively affect your credit score. Be selective about applying for new credit and only do so when necessary. Instead, focus on building a positive credit history with your existing accounts.
  • Pay Off Existing Debts: High levels of debt can have a bad impact on your credit score. Take steps to reduce and eventually pay off your existing debts, such as credit card balances, personal loans, or outstanding balances on lines of credit. By reducing your debts, you effectively decrease your credit utilisation ratio, which measures the amount of credit you are utilising to your available credit limit. A lower credit utilisation ratio indicates responsible credit management and has the potential to enhance your credit score.
  • Establish a Good Payment History: Consistently making on-time payments is crucial, but it’s equally important to establish a long-term history of responsible credit usage. Avoid closing old credit accounts, especially if they have a positive payment history, as they contribute to the length of your credit history. The length of your credit history is a factor in calculating your credit score, so keeping older accounts open and active can be beneficial.
  • Practice Responsible Credit Usage: Use credit responsibly by keeping your credit card balances low and paying them off in full each month. Aim to keep your credit utilisation ratio below 30% to demonstrate that you manage your available credit effectively. Avoid maxing out your credit cards or carrying high balances, as it can negatively impact your credit score.

Get a free Australian mortgage assessment today.

Apply online to get a free recommendation with real rates and repayments.

How Do I Know If My Credit Score Has Improved?

To determine if your credit score has improved, you can follow these steps:

  • Obtain your credit report: Request a free copy of your credit report from credit reporting agencies such as Equifax, Experian, or Illion. You are entitled to one free annual credit report from each agency by law.
  • Check your credit score: Some credit reporting agencies provide a credit score along with the credit report, while others may charge a fee to access your credit score. You can obtain your credit score directly from these agencies or through third-party providers that offer credit score services in Australia.
  • Credit monitoring services: Consider subscribing to a credit monitoring service that regularly updates your credit score and any changes in your credit report. These services often send alerts and notifications when your credit score improves or when there are significant changes to your credit file.
  • Credit score providers: There are online platforms and financial institutions in Australia that offer free credit scores. They allow you to access your credit score periodically and track its changes.

The Top 5 Mistakes That Can Hurt Your Credit Score

Avoid these common mistakes to protect your credit score:

  • Late or Missed Payments: These can remain on your credit report for up to seven years.
  • Applying for Credit Too Often: This can suggest financial stress to lenders.
  • Ignoring Your Credit Report: Regular checks help you catch and dispute errors.
  • Maxing Out Your Credit Card: High credit utilisation can harm your score.
  • Not Paying Taxes or Fines: Unpaid taxes and fines can also negatively impact your credit score.

Credit Score Myths: What You Need to Know

Avoid falling into the trap of common credit score myths:

  • Myth: Monitoring your credit score will cause it to decrease.
    • Fact: You can check your credit score as frequently as you want without any impact on its value.
  • Myth: I’m not borrowing, so I don’t need a credit score. 
    • Fact: Even if you don’t need a loan now, having a good credit score can benefit future financial opportunities.
  • Myth: Once bad, my credit score can never improve. 
    • Fact: By consistently practising good financial habits and making efforts to improve, you can gradually enhance your credit score.

What Are The Potential Outcomes Of Credit Score Application?

When the lender’s system evaluates your application, there are three potential outcomes:

  • Pass: If your credit score meets the required criteria and you satisfy all other aspects of the bank’s policy, your home loan will be approved.
  • Fail / Declined: If your credit score falls short of the threshold, your mortgage application will be promptly declined. In most cases, bank personnel cannot override the system’s decision.
  • Refer: If the system encounters inaccuracies in the data, cannot accurately evaluate your application, or falls on the borderline between approval and rejection, your application may be referred to a credit manager for a comprehensive assessment.

Why Did I Fail My Credit Score?

There can be several reasons why an individual fails to meet the required credit score for a particular loan or credit application. Here are some common factors that may contribute to a failed credit score:

  • Payment History: If you have a history of late payments, missed payments, or defaults on previous loans or credit accounts, it can negatively impact your credit score.
  • High Credit Utilisation: Utilising a large portion of your available credit limit can suggest financial strain and may lower your credit score.
  • Limited Credit History: If you have a limited or thin credit history with few or no credit accounts, it can be challenging for lenders to assess your creditworthiness, potentially resulting in a lower credit score.
  • Public Records: Bankruptcies, tax liens, and court judgments can significantly impact your credit score and make it more difficult to qualify for credit.
  • Multiple Credit Applications: Making several credit applications within a short period can raise concerns about your financial stability and may negatively affect your credit score.
  • High Debt-to-Income Ratio: If your monthly debt obligations are relatively high compared to your income, it can indicate a higher risk for lenders, potentially leading to a lower credit score.
  • Errors or Inaccuracies: Mistakes on your credit report, such as incorrect account information or inaccurately reported late payments, can unfairly lower your credit score.

How Does Being an Australian Expat or Foreign Buyer Impact Your Credit Score?

Australian expats and foreign buyers face unique challenges regarding credit scores. If you’re an expat, lenders may consider you a higher risk due to your overseas residence. 

Foreign buyers might find their overseas credit history doesn’t transfer to Australia, starting from zero. Both cases underline the importance of maintaining a good credit score in Australia, even while living abroad.

Understanding and improving your credit score for a home loan is an essential financial skill, particularly for Australian expats and foreign buyers. A good credit score can open the door to better home loan offers and save you significant money in the long run. Remember, improving your credit score is a marathon, not a sprint. With patience, consistency, and good financial habits, you can confidently and succeed in the Australian mortgage market.

While this guide provides a comprehensive understanding of credit scores and their impact on home loans, every financial journey is unique. Personalised advice tailored to your circumstances can make all the difference.

That’s where our team of experienced expat mortgage brokers comes in. At Odin Mortgage, our mortgage brokers are well-versed in the intricacies of the Australian mortgage market and can provide invaluable guidance for your specific situation.

So why wait? Start your journey to homeownership on the right foot. Contact Odin Mortgage today and let us help you navigate the complexities of obtaining a home loan in Australia. It’s time to turn your Australian property dreams into reality.

Get a free Australian mortgage assessment today.

Apply online to get a free recommendation with real rates and repayments.

Frequently asked questions

You can check your credit score for free once a year from each credit reporting agency in Australia: Experian, Equifax, and illion.

Improving a credit score is a gradual process that may take several months or even years, depending on the current state of your credit history.

Yes, multiple loan applications within a short period can lower your credit score, as each application involves a hard credit inquiry.

Yes, it’s possible to get a home loan with a low credit score, but it can be more challenging. You may face higher interest rates or stricter loan terms. Some lenders specialise in serving those with lower credit scores.

Credit scores typically update every 30 days, but the exact timeframe can vary based on the credit reporting agency and when your creditors report your information.

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