What do lenders mean by a good credit score?
When you first embark on home ownership or property investment, you come across a variety of unfamiliar terms.
There are loan-to-value ratios, unconditional contracts and credit scores to learn about.
In this article, however, we’re going to focus on what a good credit score is in Australia, because many people underestimate the role of finance and the important of your score when it comes to fulfilling their property dreams.
What is an Equifax score?
When you first apply for a home or property investment loan, there are a large number of financial checks and balances that will be assessed by your lender of choice.
The components of a successful loan application can be complex, and having a qualified and professional mortgage broker help you navigate the process is an excellent approach to boosting your chances of success.
That said, you are entering into a serious, binding, legal agreement with the lender, so you should take time to understand important elements involved. One of the most significant fundamentals to understand is the Equifax Score (previously known as a VedaScore), which most Australian lenders use as a credit rating.
The Equifax Score helps lenders assess your credit application when you apply for a loan or line of credit. Similar to a tool that ranks your risk, all credit information is used to predict the outcome of your loan within the next 12 months.
It’s equally important to recognise that in addition to your Equifax Score, lenders will apply their own lending criteria, so you shouldn’t rely solely on your Equifax Score as an indicator of whether you can apply for the credit or not.
Your credit score isn’t just about the actual financials you might see on a balance sheet or profit and loss statement. Many people don’t realise the way in which you conduct yourself financially can impact your credit score. For example, if you regularly miss your credit card payments or are always overdue paying your monthly phone bills, then this can have a negative outcome on your credit score.
This is when seeking advice from a mortgage broker can be invaluable. They can provide guidelines you can apply in the lead up to a loan application that will demonstrate good financial practice to the lender, and this will ultimately help you in the loan approval process.
What is considered a good credit score?
One of the benefits of understanding your credit score is that there are specific guidelines about what constitutes a good score.
Your Equifax Score is a credit rating between 0 and 1200 that lenders look at when you apply for a loan. Put simply, the higher your credit score the better, because your credit score affects your access to better loan and credit card deals.
Your Score is calculated via the information on your credit report at a certain point in time so it is not a fixed figure, but rather changes as information is added or removed from your report.
You Equifax Score indicates the likelihood of an “adverse event” being recorded on your credit file in the next 12 months. An adverse event can be a range of “bad credit” listings such as a default, a bankruptcy or a court judgment.
So, with this in mind, the higher your score, the less likely it is that an adverse event will be recorded on your file and the less of a risk you will appear to lenders. The lower your credit score, conversely, the riskier you will appear as a borrower.
Here’s a summary of what you Equifax Score indicates:
Below average to average (0-509): It’s more likely an adverse event will be recorded on your file in the next 12 months. You are in the bottom 20 per cent of Veda’s credit-active population.
Average (510-621): This score suggests that it’s likely that you will incur an adverse event in the next 12 months. Your score places you in the bottom 21 to 40 per cent of the credit-active population.
Good (622-725): Adverse events are less likely to be recorded for the next 12 months. You fall in the mid-range (41 to 60 per cent) of Veda’s credit-active population.
Very good (726-832): Unfavourable events are unlikely to be recorded onto your credit file within the next 12 months. Your score places you in the second-highest percentile range of the credit-active population (61 to 80 per cent).
Excellent (833-1200): Adverse events are highly unlikely to happen within the next 12 months when compared to the average Australian. The odds of no adverse events occurring on your credit file in the next 12 months are five times better than the population average and you are in the top percentile range (81 to 100 per cent).
OK, I understand, but how are credit scores actually calculated?
The thing about credit scores, particularly in the modern era, is that they’re not assessed by a high-level genius with a calculator running their eye over your bank account and credit card statements.
Today’s technology means credit scores are now calculated by an algorithm which draws on information from your credit file. Your credit score is, therefore, generated by looking at patterns in your credit history, characteristics of your credit profile, and aspects of your credit applications.
There are a number of variables that are considered during the calculation of your credit score. These can include:
- The number of applications you make to different credit providers within a short period when you’re “shopping around” for credit. This will increase the number of credit enquiries on your credit file and is less favourable than having infrequent and fewer credit enquiries.
- The spread of credit enquiries over time can influence your score too. Older credit enquiries have a different level of risk associated with them than more recent credit enquiries. That’s why it’s so important to keep your credit enquiries to an absolute minimum.
- Negative information such as defaults, serious credit infringements, bankruptcies, and court judgements are high risk indicators which can adversely impact your credit score.
- Even your personal details can come into play. This can include your age, length of employment as well as length of time at your current address. Credit assessors generally like to see stability of employment and in your living situation, which both can improve your credit score.
- The age of your credit history can impact your credit score, so a credit file with a longer credit history will have a different level of risk than a newer file with a limited credit history.
- When calculating your credit score as a business owner, variables such as the location of your business, the length of time your business has operated at its current address, and the credit history information contained in the commercial section of your report may be considered. For this reason, it can be more difficult for business owners to have credit applications approved.
How can I improve my credit score?
Because your credit score is an organic measure that can gauge changes in your financial dealings, there are practices which can be implemented to improve your score.
The number one thing is also the simplest – pay your bills on time! No excuses!
We know it can be tricky to keep up with debts, but online banking makes it easy to never miss a bill payment by setting up reminders or scheduled payments. That way you should never miss a payment – even if you’re on holiday at the time!
Also, pay off credit card balances in full in every month.
That said, when it comes to your credit score, the balance of your credit card debt is less important than your credit limit. So, consider lowering your limit from, say, $15,000 to $5,000 to gain some credit score points.
This approach is particularly important if you have more than one credit card, because all of the limits across the cards will be included in the calculation of your credit score.
In fact, axe any credit cards that you don’t use or are there for a “rainy day” because that will likely have a favourable impact on your credit score.
Also, if don’t have a credit card (which isn’t necessarily a bad thing) you should consider getting one – as long as you can pay off the balance every month. You see, your credit score is partly assessed on your ability to manage debt such as a credit card or a personal loan, so it’s important that you can show that you’re responsible and can pay off debt promptly.
Intuitive Finance – the smart choice
You can now see, there’s more to being approved for a personal loan or a home loan than just filling out some paperwork and blindly hoping for the best.
Your ability to consistently manage credit and repay debt is but one of the ways that can influence how your credit score is calculated.
The world of banking and finance can be a pretty daunting one for both novice and sophisticated investors and since our establishment in 2002 we’ve focused on providing outstanding service and business standards.
This approach was vindicated when we received the Finance Broker Business Award at the 2018 Mortgage and Finance Association of Australia (MFAA) Excellence Awards.
Understanding what constitutes a good credit score as well as the ways that you can improve your score is vitally important in today’s financial world. So why not contact Intuitive Finance today to ensure you have the right information and expert support on your side no matter what stage of the property ownership journey you are on?
Discuss your specific needs & formulate the right strategy for you. Get in touch to organise your complimentary 60min session today!