How your credit score impacts your ability to get a mortgage

What is a credit score?

A credit score is a numerical representation of your creditworthiness, typically ranging from 0 to 1200 in Australia. It’s calculated based on your financial history, including:

• Payment history (e.g., on-time bill payments).
• Amount of debt owed.
• Length of credit history.
• Types of credit used.
• Recent credit inquiries.

Your credit score reflects how responsibly you’ve managed credit in the past. Higher scores suggest that you’re a reliable borrower, while lower scores may indicate potential risk to lenders.

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Should you check your credit score?

Checking your credit score is highly recommended as part of financial planning, especially if you’re considering applying for a mortgage. Regular checks allow you to:

• Identify errors: Ensure your credit report is accurate and dispute any mistakes.
• Monitor progress: Track how your financial habits impact your score.
• Avoid surprises: Be aware of your credit standing before lenders review it.

Soft inquiries - such as when you check your own credit score - do not impact your score, so there’s no harm in staying informed. However, avoid excessive hard inquiries, which occur when lenders assess your credit for loan applications, as they can lower your score.

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What is considered a good credit score?

In Australia, credit scores generally fall into these categories:

• Excellent (833-1200): You’re seen as a very low-risk borrower and likely to receive the most favorable loan terms.
• Very good (726-832): You’re considered low risk and have a high chance of loan approval.
• Good (622-725): You’re deemed a reliable borrower but may not receive the best interest rates.
• Fair (510-621): Lenders may consider you a moderate risk, potentially resulting in higher interest rates or stricter loan conditions.
• Poor (0-509): You’re seen as high risk, and approval chances are significantly lower.

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How credit scores influence mortgage approval

• Loan approval: Lenders use your credit score to assess the risk of lending to you. A high credit score suggests you’re likely to repay your loan on time, increasing your chances of approval. Conversely, a low credit score may lead to rejection or require additional guarantees, such as a larger deposit or a guarantor.
• Interest rates: Your credit score can also affect the interest rate offered. Borrowers with higher credit scores are often eligible for lower interest rates, which can save thousands of dollars over the life of the loan. A lower score may result in higher interest rates, increasing your monthly repayments and overall loan cost.
• Loan amount and terms:  Lenders may impose stricter terms or limit the loan amount for borrowers with lower credit scores. This could affect the type or value of the property you can afford to buy.

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Tips for improving your credit score before applying for a mortgage

If your credit score needs improvement, taking steps to boost it before applying for a mortgage can pay off significantly. Here’s how:

• Review your credit report: Obtain a free copy of your credit report from agencies like Equifax. Check for errors, such as incorrect account details or fraudulent activity, and dispute them if necessary. Regular monitoring ensures your credit file accurately reflects your financial behavior.
• Pay bills on time: Your payment history is a significant factor in your credit score. Set up reminders or automate payments to ensure all bills—including utilities, credit cards, and loans—are paid on time. Consistent, on-time payments demonstrate financial responsibility to lenders.
• Reduce credit card balances: High credit card balances relative to your credit limit can negatively impact your score. Aim to reduce your balances and keep your credit utilization ratio below 30%. This shows lenders you’re managing credit responsibly and not overextending yourself.
• Avoid multiple credit applications: Each credit application results in an inquiry on your credit report, which can lower your score. Minimise applications and focus on securing credit only when necessary. Too many inquiries in a short period can signal financial distress to lenders.
• Close unused credit accounts: Having too many open credit accounts can make lenders wary. Close any accounts you no longer use, but be mindful of maintaining a healthy credit utilization ratio. A long credit history on active accounts can positively impact your score.
• Consolidate debts: If you have multiple debts, consider consolidating them into a single loan with a lower interest rate. This can simplify repayments and potentially improve your credit score by making debt management more efficient.
• Establish a positive credit history: If you don’t have much credit history, consider using a credit card responsibly to build your score. Pay off the balance in full each month to avoid interest charges. Demonstrating consistent, responsible credit use over time strengthens your credit profile.

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Your credit score plays a vital role in determining your ability to secure a mortgage and the terms of your loan. By understanding its impact and taking proactive steps to improve your score, you can increase your chances of approval and potentially save money on interest rates. If you’re unsure where to start, consider speaking with a financial advisor or mortgage broker who can guide you through the process and help you achieve your homeownership goals.