Your credit score is one of the things many lenders will look at when deciding whether to approve your application for a home loan. Credit scores are important for a couple of reasons.
- Lenders have a legal obligation to verify that you can afford your repayments before they give you a loan. Your credit score is one way for potential lenders to gauge whether you’ve had problems repaying loans before, and therefore might struggle to make future home loan payments.
- Lenders need to assess the level of risk for any home loan they approve. If you default on your loan, this could leave the lender out of pocket.
Your credit score is shown as a number between zero and 1000 or 1200 indicating how much of a credit risk you’re likely to be based on your history. This score helps larger lenders set up their credit assessment process to automatically reject any applicants who have a credit score below a certain number.
The problem with automated credit scoring is that often a human will never see the application before it’s rejected, so there’s no understanding of context or extenuating circumstances which might have led to the lower credit score. That’s why smaller, more personal lenders like Bluestone prefer to look at the whole credit file and talk to the applicant about the context of any previous issues before making a decision.
Seven reasons for a low credit score
Even though your credit scores can have a far-reaching effect on your financial situation, many people don’t really understand how they work.
Here are seven things that could affect your credit score and make it harder for you to get a home loan.
- Missed credit card repayments. Did you know missing a single credit card repayment can lead to a 22% drop in your credit score? A missed payment is one that’s more than 14 days late. Leave it for 60 days without repayment and you might end up with a default on your file, which will stick around for five years.
- Late bill payments. You might think it’s no big deal if you’re a bit late paying an electricity bill but even if you pay it before it becomes a default, it can still show up on your credit rating.
- Multiple credit enquiries. If you have a lot of credit applications in a short space of time it can reflect badly on your credit rating and make potential lenders wonder if you’re desperate for money.
- Certain types of debt. Existing debt is not necessarily bad for your credit rating, but there are some types of debt that lenders will see as a red flag, including payday loans and multiple credit cards.
- Previous bankruptcies. Bankruptcies stay on your credit rating for two years from the date of the end of the bankruptcy, or five years from the date the bankruptcy started.
- Defaults. If you have a history of payment defaults, it’s going to affect your credit rating in a major way. Conversely, paying your bills on time can reflect well on your credit rating and make you a more attractive proposition to lenders.
- Court appearances related to debt. If you have previously received a writ, summons or court judgement relating to unpaid bills, your credit rating will be affected and it will be harder for you to get a home loan.
How are credit scores calculated?
To add to the confusion, in Australia, we have three major credit bureaus and they all have a different way of calculating credit scores. They are:
All three use an algorithm to create a score between zero and 1000 (for Equifax it’s between zero and 1200). While there are differences between the three, they take the same behaviours into account, so what affects your credit score with one will affect it across all three.
I have a bad credit score – does this mean I can’t get a home loan?
Bad credit can happen to the best of us, through unforeseen life events, upheaval and circumstances that are out of our control. While the mainstream banks may not approve you for a home loan, it doesn’t have to mean an end to your dreams of home ownership.
Mainstream lenders often use automated credit scoring systems that will automatically decline you on the basis of your credit score, but at Bluestone, we prefer to take a more personalised approach to assessing home loan applications. All our applications are assessed by a human, not an algorithm. Instead of just looking at your credit score, we assess your credit file as a whole. This means we look at your credit history with a view to understanding the context around any previous arrears or defaults.
Once we know the full story, we can make an informed decision on your application and what home loan and interest rate would be applicable for your situation. In many cases, if you have previous defaults or credit impairments, we may still be able to help you with our Specialist and Specialist+ home loans.
Through Specialist and Specialist + we can help borrowers with:
- Up to two defaults over $1000 within 12 months
- Defaults greater than 12 months or less than $1000
- Discharged bankruptcies over two years old
- Part IX and X debt agreements.
So if life hasn’t gone according to plan and you find yourself with a less than perfect credit score, don’t panic – talk to Bluestone. You may still be able to get a home loan and find your financial feet again.