If we were living in a perfect world – the kind of world where almond lattes didn’t cost $1 more, and shoes were tax deductable – we’d all be able to pay for our wants and need upfront with no hassles. But in this imperfect world, buying a house requires getting a mortgage. But hey, at least we have Tetsuya’s.
Getting a mortgage depends upon a few factors, one of the main ones being your credit score.
What is a bad credit score? Why is it important?
Be it that Mini Cooper you’ve been eyeing, or a two-bedroom apartment in Sydney, your dreams all get realised with access to credit from financial institutions.
But thanks to the GFC, getting access to credit isn’t as easy as it used to be. Thank you, 1%!
No longer do financial institutions simply look at your ability to pay back a loan, but they look at your previous credit history, too. That is, if you’ve been reliable paying your credit cards, other loans, and even your bills on time. Otherwise known as your credit score or credit history, banks and lenders will need to evaluate your past records to determine whether you’ll be able to make mortgage repayment. If you’ve been fabulous with your spending habits, paid the minimum payment of your credit card and loans on time, and never received a late payment notice from your phone company or landlord, then I have to hand it to you. You probably have a good credit score.
Not sure if you credit score is good or bad? When it comes to finances, what you don’t know can hurt you.
Before you start down the home buying journey, it pays to check your credit report. You’ll save yourself time, and potentially a lot of heartache.
Get your credit report
Unlike the US and the UK, Australian mortgages aren’t regulated by a standard credit scoring system. Banks and lenders use their own unique criteria to assess your credit history – whether it’s bad or good – and this isn’t publicly available. What we do know is that they’ll take into account things like enquiries (when you ask someone for credit) and defaults (when you don’t make your repayments). And soon, with changes to the Privacy Act underway, they’ll also have access to more data via a Comprehensive Credit Reporting system.
In the past, if a lender wanted information on an individual, they’d be limited to negative credit reporting – that’s credit applications and credit defaults.
In March 2014, a change in legislation to privacy laws means lenders will soon have access to a whole range of data, including how well an individual was able to make repayments in the past.
What to do if you have a bad credit score
Your dream home is juuuust within your reach…but you have a bad credit score that’s blocking you from achieving your life’s goal to have a walk-in wardrobe.
Some banks will automatically decline your application if you have a bad credit score. Others will refer to a credit assessor to review. Once the verdict’s in, it can be hard to overturn.
If you do have a bad credit score, below is a few tips to help reverse the damage. It might take a while to get back on the right track – sometimes up to a few years, depending on your credit score – but it’s never too late to turn things around.
It’s really important to get the right expert advice so you can get back on track as quickly as possible. Call us and we’ll be your turn-by-turn navigation back to good credit.
How to keep your credit score in tip-top shape
A bad credit score can take years to fix so here’s a couple of pointers to help:
- Resist the urge to ‘shop around’
When you want a loan, you’ll likely want to apply to a few different lenders to see who’ll give you a better deal. It’s a technique your parents probably taught you, because shopping around means you’ll get the best laptop, car or flat screen TV. Why would it be any different with your home loan? You’re not sure which bank or lender will be more flexible, so it makes sense, right? This might work for buying white goods and appliances, but lots of enquiries can be seen as bad in the world of finance. On paper, it looks like you might be shopping around because you’re getting declined.
This is where a mortgage broker can help you. We know the ins and outs of banks and lenders, and know exactly what they’re looking for so you can get it right the first time you apply.
- Pay off your credit cards and loans
As boring as it sounds, paying things on time and even getting rid of your debt is one of the best ways to improve your credit score (and your overall financial situation!). But if you have tens of thousands of dollars owing, it can be disheartening if your progress is slower than you’d like.
Here’s a neat psychological trick – use the ‘snowball method’. Pay off the cards with the lowest balances first. These small wins will motivate you to keep paying off your debt, and make that mountain seem more like a series of smaller hills to climb. Alternatively, you could use the ‘highest interest method’ and pay off the cards with the highest interest rates first. Whilst the highest interest method is more efficient, the snowball method can increase your chances of getting there.
When you’re ready to buy your first home, it pays to take a peek at your credit report. That way, you’ll be able to tell if you’re headed in the right direction – the ensuite master room of your dreams – or in the wrong direction – endless credit card debt and only last season’s Country Road to show for it.
Need help understanding your credit score? The team at Mortgage Guy are happy to help! Get in touch with us today.