What your credit score means for your dreams of homeownership.
In 2014, the way Australians’ creditworthiness was measured changed significantly. Changes to the Privacy Act introduced Comprehensive Credit Reporting, or positive credit reporting. This meant that lenders now had new information with which to assess borrowers. It also introduced credit scoring to Australia.
Credit scoring provides a measure of your risk of future default based on your credit history. Your credit score, or Equifax Score, is a number out of 1200 that lets lenders know how much of a risk you are.
What credit score do I need to get a home loan?
Unfortunately, this question is difficult to answer. Lenders in Australia don’t make their credit criteria public. Moreover, most lenders don’t rely solely on your Equifax Score to determine whether or not you’re at risk of default. Instead, they use their own internal credit assessments along with your Equifax Score.
While it’s tough to definitively state what the cut-off point is for a home loan, Equifax Scores do have benchmarks that can be useful in getting an idea of how likely you are to be approved for a home loan.
- Excellent: A score between 833-1200 is considered Excellent. This means you are at extremely low risk of defaulting in the next 12 months. If your score is in this range, you’re unlikely to run into any trouble getting a home loan.
- Very Good: A score from 726-832 is considered Very Good and puts you in the top 40% of the Australian population in terms of your creditworthiness. Most lenders would look very favourably on you.
- Good: A score from 622-725 is classified as Good. This still puts you in good standing and the likelihood of an adverse event occurring on your credit file in the next 12 months is considered below average.
- Average: A score from 510-621 puts you in the bottom 21-40% of the active population. This means you’re likely to suffer an adverse event on your credit file in the next 12 months. Keep in mind, though, that lenders will still take into account their own assessments, as well as your income and liabilities.
- Below Average to Average: Any score below 509 puts you in the Below Average to Average category. Lenders consider the likelihood of an adverse credit event high. You may have trouble obtaining finance from traditional lenders.
Credit scores for bad credit borrowers
A VedaScore of Below Average to Average isn’t necessarily a death sentence for your dreams of homeownership. There are lenders who specialise in offering home loans to borrowers with bad credit. They’ll take a more hands-on approach in assessing your credit history, taking into account extenuating circumstances. You’ll end up paying more in interest, but you’ll also have the opportunity to begin rebuilding your credit history.
How is my credit score calculated?
Your credit score consists of a variety of factors from your credit history, including:
- Number of credit enquiries. Applying for a lot of credit cards or loans can adversely affect your credit score.
- Defaults. If you’ve defaulted on a debt, this will impact your credit score.
- Type of credit applied for. Your VedaScore will be different depending on the type of credit and the size of the loan you’re after. Mortgages are calculated using a different risk profile than something like a personal loan.
- Court writs or judgements. Any writs or default judgements will negatively impact your score.
- Payment history. This is where the “positive” in positive credit reporting comes in. Your credit file will also reflect your on-time payments, which can help balance out some negative marks.
How do I find out my credit score?
You can access your Equifax Score free through finder.com.au. You’ll get a copy of your score, along with an explanation to help you sort out the ramifications of your credit history. You can also get tips on how to improve your credit score.
Remember, a low Equifax Score may limit your options, but it doesn’t necessarily close the door on your homeownership ambitions. Even with a less-than-perfect credit history, there may still be home loan options available to you.