When it comes to applying for a home loan, your credit score can be an important factor that lenders will assess. A good credit score can open doors to better loan terms, while a poor credit score could make it harder to secure financing—or limit your options, especially with the big banks.
At Bluestone Home Loans, we understand that navigating the complexities of home loan approval can be challenging, especially when it comes to understanding credit scores. This is why we don’t make an assessment on score alone, instead considering all of your financial circumstances.
In this guide, we’ll explain what a credit score is, how it may impact your ability to borrow money, and how you can improve your it to increase your chances of securing a home loan with favorable terms.
What is a Credit Score?
A credit score is a numerical representation of your creditworthiness, which is determined based on your credit history. It helps lenders evaluate the risk of lending money to you. The higher your credit score, the less risk you pose to the lender, and the more likely you are to receive favorable loan terms. A low score, on the other hand, may indicate a history of missed payments, high debt, or other financial risks, which could make it harder for you to borrow money or result in higher interest rates.
Credit scores generally range from 0 to 1,000 or 1,200 in Australia, with the most common score ranges being:
- Excellent (750 – 1,000): Lenders consider you a low-risk borrower. You’ll typically qualify for the best interest rates and loan terms.
- Good (700 – 749): You’re a reliable borrower, and most lenders will offer you competitive loan terms.
- Fair (550 – 699): While you might still qualify for a loan, your interest rates could be higher. You may also need to provide more documentation to prove your financial stability.
- Poor (below 550): A low score suggests you may have had difficulty managing credit in the past. You may still be able to get a loan, but with high interest rates, and the loan amount might be limited.
Why is Your Credit Score Important When Applying for a Home Loan?
Your credit score is one of the first things lenders check when you apply for a mortgage. Lenders use your score to assess the risk involved in lending you money. A higher score generally means that you’ve managed credit responsibly, which gives lenders confidence that you’ll be able to repay the home loan. Conversely, a lower score indicates that you may have a history of financial issues, which could make lenders less willing to offer you a loan or result in higher interest rates.
Here’s how your credit score directly impacts your home loan application:
- Loan Approval
Lenders typically have a minimum credit score requirement for home loan approval. Each lender is likely to have a minimum score, and if yours below this, you may face difficulties being approved, or you need to provide additional documentation to demonstrate your ability to repay the loan. - Interest Rates
Your credit score often impacts the interest rate you’re offered. Borrowers with higher credit scores or cleaner credit histories are often rewarded with lower interest rates, which can save you thousands of dollars over the life of your mortgage. Those with lower scores may be offered higher rates as a way for lenders to offset the perceived risk of lending to you. - Loan Terms
In addition to the interest rate, your credit score can influence the loan terms offered. A higher credit score can help you secure more favorable terms, such as a larger loan amount or a loan with fewer fees. On the other hand, a poor credit score may limit your options, making it harder to borrow larger amounts or secure loans with flexible repayment terms. - Lender Mortgage Insurance (LMI)
If your credit score is low or you have a high Loan-to-Value Ratio (LVR), lenders may require you to pay for Lenders Mortgage Insurance (LMI). This insurance protects the lender in case you default on the loan. While LMI is often associated with borrowers who have a small deposit (less than 20%), having a low credit score can also trigger the requirement for LMI, adding significant costs to your loan. At Bluestone, we don’t charge LMI! - Ability to Refinance or Access Additional Credit
Your credit score doesn’t just affect home loan applications; it can also impact your ability to refinance later on or access additional credit. Maintaining a good credit score will make it easier for you to refinance your mortgage for a better rate in the future or apply for other loans, such as a personal loan or car finance.
How to Check Your Credit Score
Checking your credit score is a simple and free process. There are a number of online services in Australia where you can obtain a copy of your credit report and score. The major credit reporting agencies include:
- Equifax
- Experian
- Illion
These agencies provide a detailed credit report that includes your score, any negative credit history, and other important information that lenders use to assess your creditworthiness. Make sure to check your report regularly, as errors or outdated information can sometimes impact your score.
How to Improve Your Credit Score Before Applying for a Home Loan
If your credit score isn’t where you’d like it to be, there are steps you can take to improve it before applying for a home loan. While it may take time, improving your credit score can significantly increase your chances of securing a favourable loan.
- Check Your Credit Report for Errors – Sometimes credit reports contain errors that could negatively affect your score. Check for inaccuracies, such as incorrect payment histories, accounts that aren’t yours, or missed payments that were actually made on time. If you find any errors, contact the credit bureau to have them corrected.
- Pay Your Bills on Time – Payment history is one of the most important factors that influence your credit score. Ensure that you pay all of your bills—credit cards, utilities, and loans—on time. Even a single missed payment can cause a significant drop in your score.
- Reduce Your Credit Card Balances – High credit card balances can negatively affect your credit score. Try to keep your credit utilization ratio below 30%, which means you should use no more than 30% of your available credit. Paying down existing credit card debt will have an immediate positive impact on your score.
- Avoid Opening New Credit Accounts – When applying for a home loan, avoid opening new credit accounts in the months leading up to your application. Every time you apply for credit, it can trigger a hard inquiry, which can slightly lower your credit score.
- Consider a Debt Consolidation Loan –If you have multiple debts with high interest rates, consolidating them into a single loan can improve your credit score. This will make it easier to manage your payments and help reduce your overall debt faster.
- Stay on Top of Your Financial Obligations – Consistently staying within your budget and managing your finances wisely can help you build a positive credit history over time. Demonstrating financial responsibility is key to boosting your score.
The importance of seeking professional, qualified financial advice
While this guide provides valuable insights into understanding and improving your credit score, it’s important to remember that everyone’s financial situation is unique. When making significant financial decisions—like applying for a home loan—it’s always a good idea to seek personalised advice from a qualified financial adviser or your mortgage broker.
These professionals can help you assess your individual circumstances, offer tailored recommendations, and guide you through the loan application process with confidence. At Bluestone Home Loans, we’re committed to supporting you in your home loan journey, but we always recommend speaking to an expert who can provide advice specific to your needs and financial goals.
