What is a credit score?
When the term credit score is used with respect to finance this is a number based on an in depth analysis of your credit file at the particular point in time. This unit of measure gives a clear picture and understanding of your overall credit worthiness and also if you have any defaults with finance repayments. It is used by credit providers, such as banks and other financial institutions to help them decide if they lend you money at what level of risk are you to them.
Many of the lenders will conduct their own credit scoring based on their independent model in place, in some cases this is more beneficial to you. If you’re an existing customer of a specific bank then the assessment team will search over all of your accounts, credit cards, personal loans and home loans statements and will look for the number of times you have overdrawn an account or been late with a payment. Having just one or two missed payments in the last 12 months is enough to in some cases result in you being questioned. Banks do not share this data with other banks unless the new lender requests a specific statement which shows the default. The amount of funds they will allow you to borrow may reflect on this score and can sometimes influence what interest rate they can offer you.
Your credit score is calculated by collecting your financial and personal information and then document it on your credit report to which this information is then used to calculate your credit score such as:
- Your personal details (address, age, full name)
- The type of credit providers you have used
- The amount of credit you have borrowed
- The number of credit applications and enquiries you have made
- Any unpaid or overdue loans or credit
- Any debt agreements or personal insolvency agreements relating to bankruptcy
If you do not deal with a mortgage broker first up and go to the effort of talking to multiple lenders face to face in relation to home loans they might place some unnecessary hits on your credit file for instance if you go to multiple lenders and talk about your options, request pre-approvals, this will go against you. If you apply for a number of other finance applications such as personal loans, car loans, credit/store cards or even a phone plan this may tarnish your credit file and come time you wish to apply for a home loan, the chosen lender as part of their research will look at the credit file and may be reluctant to allow you to have any borrowings or reduce the amount they will offer.
If you are conscious about having as squeaky clean credit file as possible or even going to the effort to improve your credit file, you could start with looking at your current financial situation and looking for ways to improve it. As your financial circumstances are set to improve over time your credit rating will also improve. Getting into a good credit position before you next apply for a loan can help increase the likelihood of you getting not only approved but have access to a wider range of the most suitable products.
Some simple things you can do to help improve your credit score are:
- Lower your credit card limits/finalising where possible
- Pay out personal loans/car loans where possible
- Limit your credit enquiries
- Ensure you pay your rent/mortgage and all other commitments on time
Ultimately if you are unsure whether you will actually benefit from paying out some or all of your debts this is where talking to a mortgage broker will really be in your favour. Your mortgage broker wants to do what is in your best interest and be able to deliver on getting you a home loan and will ensure you are on the right path to achieving the end result.
If you have any queries or a question regarding specific information around Credit Scoring or Credit Reports, click here to talk to your mortgage broker Gerry and he will be able to assist with answering any questions.