What is a credit score?
A credit score is a rating of an individual and their credit behaviour. A credit score reflects activity like timeliness of loan repayments as well as frequency and type of loan applications. It is something that can change over time depending on your credit activity—like if you get a credit card or a home loan.
Understanding your credit score is one of three areas I consider essential to understand in the lead up to applying for a home loan.
What is the minimum credit score for home loan application?
There is no such thing as a minimum credit score for home loan application that all lenders abide by.
Lenders use credit scoring as part of the assessment for a home loan as the credit score can serve as a reliable predictor of an individual’s propensity to repay a loan—on time. The higher the credit score, the more likely the individual will be considered for further borrowing.
The minimum credit score for home loan is something we would all like a straight answer to. If you can access your credit score for free, then you should be able to see if you have the minimum credit score for home loan in Australia, right?
Wrong.
A credit score from a credit reporting body is only one part of the assessment puzzle for lenders when they assess a home loan application. Any home loan approval is determined by a combination of assessment measures. Some are automated—like a credit score. Some are manual—like reviewing an employment contract.
Credit scores are often allocated to bands like ‘excellent’ or ‘low’. Home loan applications with lower credit scores would generally need a stronger overall application than those with higher credit scores.
What determines the minimum credit score for home loan application will be up to each individual lender. Some lenders place a large emphasis on the credit score. Other lenders might have a more manual approach to their assessment by exploring the detail within a credit report, rather than just rely on the credit score.
Who decides my credit score?
When you apply for a home loan your lender may request access to your credit report. To get a complete picture of a borrower’s credit history, lenders might use multiple credit reporting bodies.
There are three main credit reporting bodies in Australia—Illion, Equifax and Experian—who are compiling more information than ever before. Each credit reporting body collects similar information and applies similar credit scoring method—but not the same.
Since 2014, Australia has been moving towards a comprehensive credit reporting (CCR) system. Instead of basic information about an individual’s credit activity, the new comprehensive credit reporting can provide much more detail around a consumer’s financial activity —and importantly, their conduct. The comprehensive credit reports can detail information about credit behaviour and results—like if a monthly repayment is made on time or a loan application is approved or declined.
The extra information shared for credit reporting purposes has been developed to a degree whereby credit reporting bodies are now able to allocate a credit score to each person. Here is an example of how credit score might be displayed:
Role of the lender
With the consent of the individual, lenders access credit reports and credit scores from the credit reporting bodies when an application for a loan is made. They might access the credit file from more than one group because each business might hold slightly different information.
They will update the credit reporting body with the result of the application and as well as maintaining 24 months of ongoing repayment conduct.
Here is an example of how a credit report might list the repayment history for a home loan:
The symbols give the lender and idea of repayment behaviour. In this case the symbol “0” indicates the individual has been making loan repayments on time.
Role of the credit reporting body
Illion, Equifax and Experian all collect information relating to credit to hold and maintain on a person’s credit file.
They have their own algorithms to decide the credit score for an individual and can pass this information on by request. They can also share the credit report—with appropriate permissions.
Role of the credit scoring websites
Websites, in the business of providing people with their credit scores, will partner with a credit reporting body. With appropriate permission, individuals can use these websites to order a credit report. They could also request and monitor their credit score—often for free.
Credit score vs credit report?
A credit score is a strength rating of an individual’s credit history—a score with no detail.
A credit score is often a first check that may flag the need for a more comprehensive assessment. In the case of a high credit score, the assessment may require less scrutiny.
In some instances, the credit score will form part of an initial application rating that could result in a declined application—a result that some lenders cannot overturn.
A credit report contains the full history of a person’s credit behaviour. Like if a loan application was made and whether it was approved—or not.
I would argue that the detail within the credit report matters more. A credit report contains information for a lender to learn more about your credit history.
A bit like school report, but instead of “causing a distraction in in class” it might say, “many applications for personal loans and credit cards in a short space of time”.
Instead of “not handing in homework”, it might say “behind on repayments”.
Compare this report to one that said you pay attention and always hand in your work in a timely and correct manner – that should read as a good credit report.
So instead of seeking an answer to the minimum credit score for a home loan application, which is opaque at best, let’s cover the good money behaviours you might see in a credit report.
How to improve your credit score
A good credit report can be a starting point for any loan application. Here are some things to be aware of to improve your credit score in Australia.
Make sure your details are correct
Check your details. Contact the credit reporting body directly to amend any incorrect personal details and credit history.
Keep your loan applications to a minimum
Many applications with credit providers in a short space of time will negatively impact your credit score. These could be personal loans or credit cards for example.
Types of applications will affect your credit score
Carefully consider any applications for loans that may have a negative effect on your credit score. An example of this is a short-term loan like a pay-day loan.
Make repayments on time
Making your repayments on time is something that credit reporting bodies record look upon favourably. Missing repayments will negatively affect your credit score and likely require an explanation to the lender when making an application.
Missed payments
Missed payments with local councils, utility and phone companies are examples of what can be recorded on your credit file. If you have any defaults or court judgements on your credit file, these will likely have a negative impact on your credit score for a home loan in Australia.
Get your credit score for free
Why are we hearing so much about credit scores?
Credit scoring is being used increasingly in everyday language—are we all assuming each other knows what credit score means?
There are a few reasons why credit scores are becoming part of our everyday language.
Lenders are increasingly relying on credit scores for their assessments. So, consumers are becoming more educated about how to improve their credit scores.
Cyberattacks can lead to identity theft. Any activity that ends up on your credit file can adversely affect your credit score. Lenders and credit scoring businesses invest a lot of resources to convey the importance of monitoring and preserving the integrity of your credit score.
Credit score websites are focussed on attracting customers by offering free credit scores and credit score monitoring. Given there is an appetite to know more about credit scores, credit scoring websites are growing in popularity.
How can I get my credit score?
If you want find out your credit score in Australia, consider the below websites that can offer access to your credit report and credit score monitoring for free.
Wisr
- Free credit scores from two credit bureaus
ClearScore
- Offers free credit scores
- Tips to improve credit score
Credit Savvy
- SavvyShield lets users ban access their credit reports
- Useful if identity has been compromised
- Free monthly score updates and credit file activity alerts
GetCreditScore
- Free credit score
- Interactive dashboard
Credit Simple
- Free credit score checks and updates
- Also offers has a free business credit score
Final word
Credit scores play an important role in the home loan application process. An adverse credit history can result in a home loan application being declined or restrictions around interest rate discounts and other loan terms.
A minimum credit score for a home loan application is difficult to define as it is just one part of an overall credit assessment.
Improving and monitoring your credit score can certainly help with maintaining a healthy credit file and potentially increase your chances of a successful home loan application.
I consider three areas essential to understand in preparation for a home loan application. Here are three free articles designed to educate and empower:
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