Credit profile, score, assessment: if you're thinking of taking out a home loan, these are important terms you'll need to learn more about.
What is a credit score?
All credit active people have a profile. This is a summary of your history with every credit provider you've ever dealt with, and serves as a record of how well you've managed your accounts like loan repayments, overdue debts, how often you've asked for credit and the kinds of loans or credit you've applied for, and the frequency of your applications.
How it works?
Credit reporting providers summarize your profile into something called a credit score. The score is between 0 and 1200, where the higher the number, the more likely you are to be able to repay a loan. Lenders look at your credit profile and score to find out about your credit history and behavior, and assess if you are able to take on a new loan. This information reassures lenders that you're good at paying money back to those you've borrowed from – ie you are a 'low risk' client.
A good score not only makes you more likely to get approval on your home loan application – but it also means you'll qualify for a better interest rate. Of course, the other side of the coin is that if you have a poor score, you will be less likely to qualify for any new loans. This protects the lender and those with low scores from taking out additional loans and overextending themselves and getting into more debt. In short, you'll need to have a good credit score rating for your home loan application to be approved.
It's therefore a good idea to first find out what your credit score is before applying for a loan, and to give yourself time to improve it before approaching a lender.
How to check your score ?
A great place to start your research is ASICs MoneySmart site. You can get a free credit score assessment from a number of online providers, which are listed on the MoneySmart site.
How to improve your score?
Improving your credit score starts with looking at your current financial situation and ways to improve it. Getting into a good credit position before you apply for a loan can help increase the likelihood of you getting approved.
You can improve your score by:
- lowering your credit card limits
- consolidating multiple personal loans and / or credit cards
- limiting your credit enquiries
- paying your rent and bills on time
- paying your mortgage and other loans on time
- paying your credit card off in full each month
To avoid any surprises, be prepared and know your credit score.