Understanding your credit score
With house prices continuing to rise across most of the country, the vast majority of people will need to take out a mortgage in order to secure the home of their dreams. Nevertheless, this may prove to be a viable option for many prospective buyers, especially when the Reserve Bank of Australia (RBA) decided to leave the cash rate unchanged.
However, even if your finances are in good order and you feel as though market conditions are right, your lending institute still may not supply with you the supplementary credit you require to purchase a property. Why? Well, as you might guess, there are many factors that influence a bank's lending decisions, but undoubtedly one of the most important elements is your credit rating.
What does my credit rating mean?
Your credit rating (or credit score) is a document that reveals how healthy your previous relationships with debt have been. It's a grading of how well you're able to pay back your debt, and is calculated based on your credit history. Your score is heavily affected by your frequency of loan enquiries, late and missed payments and a range of other financial factors.
For example, if you were late paying utility accounts or missed a home loan payment, your credit rating will probably take a hit. Conversely, if you've always paid your bills and have generally proven to be a trustworthy debtor, it's likely that you have a fairly strong score.
Generally speaking, most Australians handle their debt fairly well. Veda, one of Australia's leading financial reporting agencies, found that the national average credit rating in 2014 was 760, up from 751 a year earlier. Australian Capital Territory (ACT) led the way with an average credit rating of 772, while Northern Territory lagged some way behind with a score of 746. The maximum possible score is 1,200.
Interestingly, Veda's report also determined that there are 2.1 million people in danger of defaulting on their credit in the next 12 months, with the highest number of at-risk debtors concentrated in Queensland.
Why is my credit rating important?
As Veda pointed out, your credit rating is important as it impacts the likelihood a credit provider will lend you money. For example, if you apply for a home loan, your bank will assess your credit rating. If you have a favourable score, you'll probably be able to secure the mortgage without too many problems. A poor rating, on the other hand, may cause your bank to issue you a loan at a higher interest rate or reject your application altogether.
How can I find out my credit rating?
Before applying for a mortgage, obtain a copy of your credit report so you can get an idea of what to expect from the home loan approval process. According to the Office of the Australian Information Commissioner, you can acquire your rating from a credit reporting body (CRB) such as Veda, D&B or Experian.
To obtain the report, you may need to prove your identity by providing:
- Driver's license
- Date of birth
What's more, you can get the report completely free once per year, if your credit application has been refused in the past 90 days, or if a CRB or lending institute finds it contains information that needs to be corrected.
Finally, remember that instances of negative credit history will be wiped from your record over time. According to the Victoria government's Money Help initiative, information about your defaults and credit applications are stored for five years, while details about your home loan and credit repayments are kept for two years.
It's never too late to establish better spending habits. Your ability to stay on top of your debts is reflected in your credit rating, which in turn will enable you to more easily take out a home loan.