When you apply for a home loan or home loan refinance, lenders will want to know as much about your financial history as they can.
This is where credit scores come into play. Your credit history can tell a lender a lot about your ability to handle a loan and make repayments. A credit score plays a crucial role in determining the interest rate and the terms of a mortgage loan.
Financial institutions use credit scores to assess creditworthiness, often relying on the FICO credit score model to determine loan approvals and interest rates.
So, what does it all mean and do you need a specific credit score to get a mortgage?
In this article, we’ll explain what credit scores are, how they are calculated and what credit score you need to get a home loan. We’ll also give you tips on what to do if your credit score is low and how you can improve it.
What is a credit score?
A credit score is a numerical figure that indicates your reputation as a borrower – essentially whether you’re trustworthy or not.
It forms part of your overall credit report which is usually reviewed by lenders when assessing any credit applications you make. Credit scoring models, such as FICO and VantageScore, are systems used to evaluate consumer credit reports to generate scores that lenders can rely on for making lending decisions. These models assess creditworthiness based on consumer behavior and credit history.
So, your credit score can play a role in determining whether a lender will lend to you or not. Additionally, your credit score can influence your credit limit on credit cards, as well as what interest rates and loan terms the lender may offer.
Depending on the credit reporting agency you use, your credit score will be a number between 0 and 1,000 or 0 and 1,200.
A higher score is generally preferred by lenders and will likely put you in a better credit rating band.
Your credit rating is the band your credit score falls into, such as excellent, very good, good and low.
How is your credit score calculated?
Your credit score is determined by a range of factors relating to how you have managed credit.
Credit reporting agencies use an algorithm to look at the information contained within your credit report.
There are three key factors that shape your credit score:
1. Credit history
Your credit history Is one of the biggest influences on your credit score. It details information about your repayment history of loans and credit scores.
Making on-time repayments consistently can positively affect your credit score.
If you’re regularly making late repayments, your credit score may suffer as a result. Any defaults, court judgements and bankruptcies are all also likely to lower your credit score.
Even the credit type and credit providers you’ve submitted applications too can affect your score. For example, payday loan applications can be a red flag in comparison to a modest car loan from a bank.
2. Credit applications
Your credit report contains information about credit enquiries and applications you’ve made. These can potentially impact your credit score.
If you have made a lot of credit enquiries – particularly in a short period of time – your credit score might be affected.
The type and amount of credit you’ve applied for can also play a part. Older elements of your credit report tend to have less of an effect on your credit score as recent enquiries would, for example.
3. Your profile as a credit borrower
Your credit profile can contribute to your credit score. It accounts for the age of your credit history and your personal details (e.g. age, employment information etc.).
Remember that credit bureaus may use different algorithms to calculate your credit score. Plus, the different bureaus may have recorded different information about you, so you shouldn’t necessarily be alarmed if you have different credit scores with different providers.
How do you find out your credit score?
You can check your credit score for free using our online tool, it only takes a few minutes.
What is the minimum credit score you need for a home loan?
Your credit score will fall somewhere between 0 and 1,000 or 0 and 1,200. The range your score sits in may vary between credit reporting bodies.
In general, having a score below 500 could make it more challenging to get approved for a home loan.
However, different lenders take different approaches to credit scores. It’s a good idea to speak to the lender you’re interested in or a mortgage broker so that you can get some expert help.
Here is how the 3 credit reporting agencies categorise their credit scores:
1. Illion
Illion uses a range of 0 to 1,000 where 0 to 299 is considered ‘low’. If your score sits here, you likely have negative data (e.g. repayment defaults or many enquiries for small amounts) on your credit file.
If your score is between 300 to 499, there is ‘room for improvement’. Potentially it means you are fairly young, which can make you seem a bit riskier to lenders. Alternatively, you may have applied for credit from a provider that services higher risk customers, for example.
A ‘good’ credit score with Illion is between 500 and 699. In this case, there probably isn’t a lot to your credit history, which means that nothing much negative can be recorded.
When your score is between 700-799, it is considered to be ‘great’. Likely you are making repayments on time but you may have several credit enquiries or loans.
A score between 800 to 1,000 is considered ‘excellent’. Those in this category are likely to be older borrowers who have been very disciplined with their repayments and applications over the years.
If you are new to accessing credit, you likely won’t have enough credit history to land in the ‘excellent’ category, so you may be in the ‘great’ category instead.
2. Experian
Like Illion, Experian uses a 0 to 1,000 credit score range. Checking your Experian Credit Report is crucial as it helps you understand how credit providers evaluate your financial behaviour and repayment history. Having a score between 0 to 549 is ‘below average’ and considered to be a poor credit score.
A score between 550 to 624 is considered ‘fair’. Average borrowers will have a ‘good’ credit rating with a score between 625 and 699. If you are above average, you might fall into the ‘very good’ category which is between 700 and 799. If you have a credit score of 800 to 1,000 your credit score is considered to be ‘excellent’ and far exceeds the average.
3. Equifax
Equifax uses a broader scale, with credit scores ranging from 0 to 1,200. 0 to 459 is ‘below average’ and 460 to 660 is ‘average’.
A ‘good’ credit score will sit between 661 to 734. If your score is ‘very good’, it will be between 735 to 852.
If you have a score of 853 to 1,200, this is considered ‘excellent’.
Equifax states that if your credit score is below 735 (i.e. very good), you may have to undergo credit repair before applying for a loan. This may depend on the lender you are applying to for a loan.
Can you get a home loan or refinance with a low credit score?
It may still be possible to get a home loan or refinance even if you have a poor credit score. What’s important to understand is that your options will be much more limited.
The big banks are unlikely to approve a loan for a borrower with low credit, but that doesn’t mean all hope is lost.
There are a number of lenders that specialise in providing bad credit mortgages. These lenders work with non-conforming borrowers who may not meet the standard credit expectations to obtain a regular home loan.
Here are some features of a typical low credit home loan:
Higher interest rates: unfortunately, you can expect to pay more in home loan interest if you have poor credit .
Higher home loan fees: not only will you likely have a higher interest rate, but you may have to cough up more when it comes to upfront and ongoing mortgage fees.
Higher deposit needed: many low credit mortgages require borrowers to have a deposit higher than the typical 20% so that the Loan to Value Ratio (LVR) is lower. This reduces risk for the lender.
If you get approved for a low credit home loan, this is a great opportunity to work on rebuilding your credit score by consistently making on-time repayments.
In many cases, it may be better to spend some time working on improving your credit score before applying for more credit. We’ll give you some tips on how to improve your credit score below.
How does your credit score affect your home loan?
Your credit score affects your home loan right from your initial home loan application, all the way to refinancing 20 years in the future.
When you apply for any home loan, the lender will almost certainly perform a thorough credit check.
Your credit score won’t be the only thing the lender looks at – your entire credit report will be combed through for any red flags.
Even if the rest of your home loan application is positive, a poor credit score can be the reason why your application gets declined.
Your credit score can also influence the interest rate a lender offers on your mortgage.
Borrowers with a squeaky-clean credit history are more likely to get access to lower rates. And if your credit score isn’t as good, there’s a chance you could still be approved for a loan, but you may have a higher interest rate.
How can you improve your credit score?
Luckily, your credit score is not a fixed number forever. There are a number of ways you can improve your credit score:
Make bill and loan repayments on time: it’s an obvious tip, but probably the most effective. Pay your bills and make your loan and credit card repayments on time. Doing this consistently for an extended period of time will cause your credit score to lift.
Review your credit file: knowing where you stand credit-wise is incredibly important if you want to improve your credit score. You’ll be able to see what the weak spots of your credit report are and pinpoint specific actions you can take to improve it.
Check your credit file for inaccuracies: believe it or not, sometimes credit reporting agencies make mistakes with your credit report. Sometimes there can be misreporting, identity theft or your personal details could be incorrect. If you have a very common name, it’s also possible that you could be recording someone else’s credit history. If you notice any mistakes, contact the credit reporting agency and your credit provider.
Reduce your credit limit: if you have any credit cards, reducing the credit limit can improve your credit score. Even if you don’t reach your credit card limit often, it can still be viewed as a potential debt.
Pay down your debt: in addition to making on-time repayments, working on eliminating existing debt altogether can be beneficial for improving your credit score.
Make smart credit decisions: avoid impulsively applying for payday loans and racking up credit enquiries. Think carefully before you apply for any new credit – especially if you have a lot of debt already.
Speak to your lender: if you’re struggling with repaying a loan, it’s better to get help before things get too bad. Most lenders will have a financial hardship team who can help devise a plan for how you can repay your loan.
Get help from a financial counsellor: a financial counsellor can provide free guidance to help you move in the right direction. They may be able to help you plan out a budget or negotiate with your lender, for example.
Learn more about improving your credit score.
How often your credit score changes
Your credit score isn’t a static number; it can change frequently as new information is added to your credit report. Typically, credit reporting bodies update credit scores on a monthly basis, but if you have multiple credit accounts or a high volume of credit activity, changes can occur more often. Here are some factors that can cause your credit score to change:
New Credit Inquiries or Applications: Each time you apply for credit, it’s recorded and can impact your score.
Changes to Repayment History: Late payments, defaults, or consistent on-time payments can all affect your score.
Credit Utilisation: Adjustments to your credit limit or how much of your available credit you’re using can influence your score.
Public Records: Events like bankruptcies or court judgments are significant factors.
Errors or Inaccuracies: Mistakes in your credit report can also cause fluctuations in your score.
It’s essential to monitor your credit report and score regularly to ensure all information is accurate and up-to-date. You can use our credit score tool to find out your credit score.
Regular monitoring helps you stay informed and take proactive steps to maintain or improve your credit score.
How does Comprehensive Credit Reporting (CCR) affect your credit score?
In recent years, Comprehensive Credit Reporting (CCR) was introduced in Australia as a way of providing a more complete idea of your credit history.
In the past, credit reporting agencies focused largely on recording negative credit information (e.g. defaults). While this information is still recorded, CCR places more emphasis on also recording positive credit behaviour.
So, borrowers who have been paying off their loans on time will have this counted towards their creditworthiness.
Whether your credit score is excellent, or you could do with some improvement, you may have home loan options. Book an appointment with your local Aussie Broker to learn more today.