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October 6, 2020

A Guide To Credit Scoring

Tony Xia

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When you’re looking for a home loan, there are a plethora of factors that can affect your application, such as age, occupation, and income. However, the credit score can also play a huge factor.

You’ve probably come across the term credit score, but you might be unsure of what it entails if you’re planning to apply for a loan in the near future, its high time that you evaluate your creditworthiness and take measures to improve or maintain it.

This article provides a comprehensive guide on ‘credit score.’

How Does A Lender Calculate My Credit Score?

Different lenders use various measures to assess your credit score. Some use their own algorithms, whereas some seek help from credit reporting agencies. Generally, factors such as the amount of credit you’ve accessed, where you accessed it from, and whether you were able to make timely repayments are taken into consideration. There are numerous ways of assessing your creditworthiness, but most of the time, a list of similar factors are taken into account, such as:

  • Your address history
  • Your employment history
  • Your repayment habits
  • The amount of credit you’ve applied for
  • The number of times you’ve applied for credit
  • Your spending habits
  • Your savings
  • Your current income

If you’re going to apply for a loan, you must consider the above-mentioned factors. If they’re less than ideal, you must work on them.

What Are The Possible Results From Credit Scoring?

Once you’ve submitted your application for credit scoring, there are three possible scenarios.

Fail/declined:If your credit score is insufficient, your mortgage application will be rejected. In most cases, bank officials can’t overturn the system’s decision.

Pass: If you have a healthy credit score and you meet all the other requirements, your mortgage will be approved.

Refer: In certain cases, your application will need to be assessed by a credit manager. This happens if your application is on the borderline of fail and pass, if there are mistakes in the data you provided or if the system is unable to correctly score your application.

How Did I Fail Credit Scoring?

There are numerous factors as to why your mortgage application was rejected but most of the time, its because you were unable to meet your lender’s minimum score. Lenders use their own methods for scoring, which they usually don’t publish.

Some common reasons for a low credit score include:

  • Late or missed repayments
  • Instability of employment
  • Numerous address changes
  • Insufficient savings
  • Poor credit history

How Can I Improve My Credit Score?

Generally, a few factors in your application lead to a poor credit score. If your score is low, you must work on those particular factors and then re-apply for a loan. If there are issues in your credit file, you can seek the help of credit repair experts to eliminate errors that were incorrectly placed on your file.

Here are some expert tips for improving your credit score:

  • Make routine deposits into your savings account
  • Do the same job and reside in the same address until you repay your loan
  • Pay off existing defaults on your credit file
  • If you have any repayments, pay them off on time
  • Don’t overdraw your credit limit

In certain cases, your best option might be to seek a mortgage from a lender that doesn’t score credit. If you’re puzzled by the process of credit repair, it’s best that you seek help from professionals.

What Is The Minimum Credit Score Required For A Mortgage?

In Australia, most lenders don’t furnish their credit scoring mechanisms, making it difficult to ascertain the minimum credit score required for mortgage approval. The credit depends on who you apply to. However, you can use the following rough guide as a benchmark:

900-1000: If your credit score is between these numbers, it’ll be easy to access a mortgage.

800-899: Generally, you’ll be considered as ‘creditworthy.’ Most lenders will consider your application.

700-799: In most cases, it won’t be a problem for you to get your application approved, but you should have a large deposit just in case.

625-699: There’s a high chance that you have some negative aspects of your credit history. However, your financial situation and current income wouldn’t be an issue. Most lenders might

view your application as high risk, and as such, it might be difficult to find a loan with lower interest, and you might need to furnish a large deposit. Additionally, unsecured personal loans can be hard to come by.

Under 625:You’ll predominantly be rejected for home loans if your credit score is under 625. In most cases, you will be restricted to lenders that do not credit score.

My Credit Score Is Low Can I Still Get A Loan?

If your credit score is low, that doesn’t mean you don’t have any other option. It just means that you won’t be eligible for particular home loans, but you’ll still be able to access some loans which usually come with higher interests. There are some lenders that particularly cater to people with low credit scores. If you’re unhappy with the interest rate that you’re provided in lieu of your low credit score, you’ll have to take measures to improve it.

My Home Loan Got Rejected. What Should I Do Next?

If the mortgage has been denied, you still have some options. It’s not always best to immediately file another application from a different lender. As mentioned above, the number of times you’ve applied for credit, along with whether it was rejected or not, can affect your chances of approval. As such, it’s best that you take a few months off to improve your credit score, budgeting, and repaying off your debts. You can also seek help from your brokers or lenders to work out the best plan ahead for you.

About Tony Xia

Having worked in the customer service and finance industry since 2011, our Director Tony Xia and his team’s highest priority is to cultivate a long-lasting relationship with clients based on trust and respect at The Mortgage Agency.

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