What property investors need to know about credit scores
When it comes to your credit score, knowledge is power. Knowing your score and how it is calculated is the first step to improving it and ensuring it doesn’t have an impact on your investment plans.
What is a credit score?
A poor credit score can have implications for your home loan application – but many Australians don’t even know what a credit score is.
Mortgage lenders in Australia have access to a figure called a credit score or credit ranking, which is used in their assessment of your loan application.
It is determined by giving weight to a variety of different factors; including the number of credit enquiries you have made, your default history (including credit card and mortgage repayments), information about the credit cards you hold, your repayment history and any bankruptcy listings.
High outstanding credit card and loan balances will have an impact on your credit score, as will the amount of separate credit accounts you hold.
Will my credit score limit my borrowing ability?
A bad credit score can result in your loan application being rejected by a lender – a severe limitation on any property investment plans.
However, different lenders have different credit score requirements, and an application rejected by one lender due to a poor credit score may be accepted by another institution.
The downside of this is that the more rejected applications you accumulate, the worse your credit score may become.
Why? Because rejected loan applications are counted as a negative mark against your score – which makes it all the more important to learn your score and target your applications accordingly.
You can, and should, conduct research into how each institution will treat your credit score by consulting with the institution’s representatives.
I don’t know my credit score, how can I find it?
You have the right to gain access to your credit score in Australia, and finding out your credit score is a simple process. You can do this by contacting the relevant credit rating agency and getting a copy of your credit file.
In Australia, the credit reporting agencies are:
- Veda.com.au
- CheckYourCredit.com.au
- Experian Credit Report
- Tasmanian Collection Service
The Office of the Australian Information Commissioner can provide you with more information on accessing your credit score.
Can I improve my credit score?
Improving your credit score will involve hard work and plenty of patience – but it can be done.
You will need to carefully assess your financial situation, address your outstanding debts and create a realistic financial plan going forward.
Debt consolidation is key to improving your credit score. Taking up interest-free credit card transfers or low-interest loans may seem like a tempting solution to debt woes, but large amounts of outstanding debt will have a detrimental impact on your credit score – regardless of the repayment rate – as well as multiple credit card accounts.
It will help to put all of your financial outgoings and account balances into a combined document, so that you can create a budget that will allow you to save for life’s necessities while working to clear your debt.
Make sure you take note of your monthly repayments and be sure to adhere to bill due dates. Late payments have a huge impact on your credit score, and getting on top of your regular repayment dates is the first step to improving your score.
It may seem obvious, but you should avoid taking on new debt if your credit score is already compromised. New phones or cars might seem like a good idea at the time, but they could drag your journey to a perfect credit score back months or years.
It is also possible for an overdue repayment or outstanding debt to be recorded on your credit score file mistakenly. If this is the case, you should get in touch with the credit reporting agency as soon as possible to have the mistake rectified.
It may pay to consult a professional, such as an accredited accountant, for advice on establishing a financial plan to improve your credit score.
The amount of time it takes to improve your score will depend upon the precise circumstances of your negative credit history.
Identity information (such as your name and date of birth) remains on your credit report for the life of the file, but time frames for other articles of information vary (information sourced from veda.com.au):
Two years:
- Repayment history information
Five years:
- Any credit enquiry
- Overdue accounts listed as a payment default
- Overdue accounts listed as clearouts
- Writs and summons
- Court judgements
Seven years:
- Overdue accounts listed as a serious credit
- Infringement
You can improve your credit score in the following ways:
- Ensure you meet all loan repayments
- Create a budget incorporating outstanding debts and repayments
- Avoid taking on more debt
- Repay any outstanding debts and ensure that this is noted on your credit file
- Make sure no incorrect credit scores are recorded on your file (you can apply to have these corrected)
Can I get around a credit score?
Wondering whether you can get around your bad credit score? The short answer is no – if you’re going through an official lender. If you want to invest in property within a short time frame it could be that you need to consider alternative strategies, like increasing your deposit so that your loan-to-value ratio is viewed more favourably by the lending institution.
Other than that, you may need to consider alternative purchase methods, such as vendor financing or investing in a property with a lending partner who has a good credit score. Both of these strategies carry significant risks and do not provide the same protections as a traditional lending channel, but may assist you to get into the property market sooner.
