A good credit score equals a higher chance of getting a home loan. While you can arrange a mortgage with a low credit score, you'd be making an already stressful financial period even harder for yourself. So, let's jump into the exciting fray of credit scores.

What is a good credit score?

A good credit score is a high score which basically means you've always paid your debts - including utility bills, personal loans and credit cards - on time, every time. As such, you're a low financial risk to lenders and they will see you as financially reliable and trustworthy with a big mortgage.

What are the benefits of a good credit score?

Lenders will love you so you're more likely to enjoy - or at least, have a better chance of - the following:

1. Faster mortgage approval
2. Potentially lower interest rates
3. Better loan terms and conditions
4. More negotiating power

How is a credit score calculated?

• Repayment history including all loans and credit cards
• Your ability to pay bills on time
• Your credit card limit
• How much you've borrowed in the past
• Your credit applications - including those for raising your credit card limit and applying for mortgages
• Bankruptcies and court judgments

You want the most accurate score possible so provide as much information as possible when checking your credit score (more on that later), even if it means providing unpleasant information such as that bill you paid late five years ago. This information will most likely come to the fore at some stage of the mortgage game so it's best to provide it now, rather than appear as if you're trying to hide it.

What credit score should I be aiming for?

As we've noted, the higher your credit score, the better - but don't expect much higher than 1,000 or at best 1,200 as that's the highest you can go (depending on the credit agency or reporting body). It's pretty rare to score 100% but don't be downcast if you receive around 850 as that's generally considered to be an excellent figure while around 600 is also great and 500 ain't too bad either.

How do I check my credit score?

Firstly, there are only three credit score companies in Australia:  Experian, Equifax, and Illion (formerly Dun and Bradstreet). However, there are multiple online websites that can assist to find your score through these companies, and many of them are free to use.

Does checking my score affect my credit file or mortgage?

No, it won't. But other similar actions might, particularly multiple credit card or loan applications and especially if these are done in a short period of time. Multiple pre-approvals also don't look good on your credit file. Lenders see such applications as risky financial behaviour ie you're desperate for credit at short notice. Raising your credit card limit is also frowned upon by lenders.

How can I improve my credit score?

Firstly, don't despair if your credit score isn't brilliant because everything's definitely not lost. There are some quick and easy ways to improve your credit score, or at the very least, have lenders like you more than they did before.

1. Start early and stay ahead: if you're planning to buy a house in the near future, start working on your credit health now.
2. Ensure you're keeping on top of your bills and if you have other personal loans, pay them off - or make extra payments - ASAP.
3. While you're organising your budget, think about setting up automatic account transfers towards both bill payments and your savings.
4. Decrease your credit card limit to as low as it can go because regardless of whether you've ever reached your limit, your lender will always assume your limit is a potential debt. And if they're already wary of your financial reliability, they won't like a high credit limit. Ideally, cut up your card altogether. (NB: You may want to look at credit cards with fewer fees and lower rates but don't be tempted into applying for several other cards at once.)
5. Look at your income and savings again and do all you can to improve these points in some way, shape or form, even if it's just going without a regular night out for awhile.

After you've ticked all these points, remember to stick with your healthy repayments and savings long-term so that when you check your credit score next, you'll have no fears. If you've never practised healthy finances before, this can be tricky but better to do it now than when you've got a large mortgage loan to repay over the next 25 years. Even if you're not thinking of buying a home, it can be a good idea to check your credit score every year just to see where and how you can improve your credit health.

We're here to help

Whether it's organising a better budget, or holding your hand while with the other, you cut up your credit card, your friendly Lending Loop team can help you. We’ve got more than 40 of Australia’s biggest banks and specialist lenders at our fingertips and repayment and borrowing calculators, refinancing and property investing are our bread and butter too. Give us a call today at Lending Loop.