For many Australians, credit files are a mystery. Marc Terrano looks at how important it is to get to know your credit file before applying for your first home loan.
The first hurdle on the track to owning your first home is getting approved for finance. To get approved, your lender will look at your credit history. This is a record of your financial history and is used by lenders to assign you a "credit rating". A good credit rating can make a big difference to your loan application, so read on to find out how it could affect you.
What is my credit history made up of?
Your credit history contains a lot of information about you financially, such as:
- Credit applications or enquiries you’ve made, both personally and commercially.
- Credit accounts which are open and current, including home or car loans and credit cards.
- Personal and commercial accounts which are late or overdue.
- Past bankruptcy information.
- Court judgements or court writs.
Some of this information, such as serious credit infringement, will be kept on your file for up to 7 years. Other information, like credit enquiries, applications, accounts or past court judgements will only be kept on your account for 5 years.
How important is my credit history when going for my first home loan?
- Lisa Montgomery is a mortgage and consumer finance expert
- Lisa has over 26 years working in Financial Services
- Lisa says an applicant’s credit history is important when applying for a home loan because there are now so many ways to have bad marks on your credit file.
‘People forget about managing their credit history because there are so many forms of credit’
‘Times have changed - you used to only have a credit card, home loan and maybe a personal loan, usually with the same provider. Now you’ve got mobile phone bills and utilities and the management of these.’
Your credit history is part of the report supplied to your prospective lender by credit file monitoring organisations like Equifax. Using this report your lender will see all of your financial information and work out how much of a risk you are, assigning you a credit rating.
Montgomery says the level of importance the banks place on your credit history depends on the rest of your application, saying ‘most lenders are open to hearing the rationale behind why things have gone pear-shaped.’
‘If everything else about your application is great, they’re usually open to explanation,’ she says.
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How important is my credit history when I apply for a loan?
How will my credit rating affect my home loan application?
Your credit rating gives your lender the information they need to know what kind of borrower you’ll be. If you have a good credit rating you could have access to more home loan options and your home loan interest rates could be lower, saving you hundreds a month on your repayments.
If you have an average credit rating, you could pay higher interest rates and have less home loan options to choose from and if you have a bad rating you may not be able to get approval for a loan at all.
Your credit rating isn’t the only factor a lender will take into account when approving or denying your home loan application, so don’t panic just yet if you’ve got a less-than-ideal record.
Other factors that affect a loan application
Montgomery says there’s "a whole bunch of criteria" that goes into your loan application, including "the size of your deposit, your employment and employment history and your income. It’s more flexible than you think."
How can I improve my credit rating?
A good place to start is by looking at your credit report and then make sure all the information within it is correct.
It’s a good idea to do this regularly and before making any financial decisions, so that if you apply for a loan there are no nasty surprises. If you don’t check before you apply for a loan and then get denied, you’ll also have this recorded in your credit history, so it pays to be careful.
Another interesting point to consider is whether or not to apply for any new credit products before you approach your lender to ask for a loan. If have no previous credit products on your credit report, taking out a credit card can be a good way to show your lender that you are able to service a debt. But be careful, it can be easy to get into debt so make sure to pay your balance off in full each month and only apply for a credit card with a low limit. Defaulting on a payment will put you back months in the eyes of the bank. Taking out credit soon before you apply for a loan can also send a negative signal to your lender.
But as Montgomery says, the best way to make your credit report look good is to change your spending patterns."If something is fundamentally wrong with your spending behaviour just fixing it on paper won’t change it. There is no get out of jail free card.
Home loan rejection
Montgomery says home loan applications are usually rejected because applicants haven’t been upfront. They may have tried to hide:
- A bad credit history
- A savings history which is not genuine, for example savings which were a gift
- Employment which hasn’t been continuous or consistent
- An income which won’t be able to service repayments
If you do have bad credit, all may not be lost. There are a number of lenders in the market who offer non-conforming loans and bad credit products, such as Pepper and Freedom Loans. You can lodge an enquiry with them using the form below. They'll get in touch with you to discuss what options you may have.