One of the first things a lender considers when you are applying for a loan is your credit score (also known as a credit rating). You may be thinking to yourself, why is a credit score relevant to my loan application? and why do I hear it mentioned seemingly everywhere in the world of loans?
This blog is intended to answer these questions, so let’s get stuck into it.
Credit Scores Explained
In the most fundamental way possible, a credit score is a representation of your financial reputation. This means the higher your score the better your reputation, this results in a higher chance of your loan being approved.
Why is It Important?
For example, if you are applying for a home loan, one of the first things a lender will check is your credit score. This can directly affect if your application is approved or rejected. It is also important to note that if you have a weak credit score and are being considered for a loan, this could impact the interest rate you are offered and the financing options available to you.
How is a Credit Score Determined?
Whenever you have an account with a creditor or vendor, they create a record of your financial history with them. Credit score agencies then collate this information and combine the data into a credit report. This credit report could include things such as; your debts, loans, payments made towards the loans, if you pay on time or not, if you have ever defaulted on a payment, the number of credit cards you have and other financial data that relates to you directly.
How Do I Know if I Have a Decent Credit Score?
Agencies all have their own method of scoring, but in most cases, your score will be between 0 and 1200. With a higher score lenders have more confidence in your ability to pay back the loan and are more likely to approve your application. As an example of how agencies might determine which bracket you fall into, we have provided a breakdown below:
- Excellent (853–1,200)
- Very Good (735–852)
- Good (661–734)
- Average (460–660)
- Below Average (0–459)
Keep in mind the above is just an example and can be used as a guide, but each agency may have its own way of rating you.
What Can I Do if I Have a Low Credit Score?
With a low credit score, you may be deemed a higher risk for lenders which may increase the interest rate you are offered or even result in your loan application getting denied. It’s a great idea to keep your credit score in mind and attempt to improve it where possible.
If you find yourself with a low credit score you can take the below steps to improve it:
- Get on top of overdue payments
- Reduce how often you apply for new credit accounts
- Pay down maxed-out credit cards
- Consider debt consolidation
For more information on the details of debt consolidation get in touch with our team.
How Do I Check My Credit Score?
Providing you have paid for any utilities or have applied for a loan or credit; you’ll have a credit score. Usually, if you request your credit report you can gain access to it within a few days online. The other option is you can have it mailed to you; however, you may have to wait a bit longer to receive it.
In Australia, your credit report is generally handled by three agencies: Equifax, Illion and Experian.
You can contact any of the three agencies and request a free credit report.
- Equifax or call them at 138 332
- Illion or call them at 132 333
- Experian or call them at 1300 783 684
Are you thinking of applying for a home loan anytime soon? Do you know what your options are? A chat with a member of the Whiteroom Finance team can help you determine a strategy that works for you.